The first principle is that you must not fool yourself because you're the easiest person to fool. - Richard Feynman.
5 investors share the biases they have overcome or are still battling.
Rajeev Thakkar
CIO, PPFAS Mutual Fund
Individually, and as a team, we have been able to largely overcome the greed and fear kind of yo-yo.
We have been able to live with underperformance in extreme overheated markets. Such as the small-and-mid-cap rally of 2017, or in 2007 (PMS) when real estate, infrastructure and commodities were at frothy evaluations. That goes for greed.
In terms of fear, we deployed money in March 2020 and April 2020, when people were extremely fearful and worried. No one knew how life would be down the road. We focused on business valuations and business characteristics and tuned out the overall macro noise and the environment.
Vishal Khandelwal
Founder, Safal Niveshak
One bias I try to overcome, but tends to get the better of me, is the Confirmation Bias. This is when we seek evidence or information to validate or confirm a preexisting belief. When we are reluctant to change our mind.
As Salman Khan said in Wanted, "ek baar jo maine commitment kardi toh phir mein apne aap ki bhi nahi sunta."
Once our mind has committed to something, we are unwilling to listen even to ourselves or disconfirming evidence telling us that we are wrong or have made a mistake. It's like that internal “Yes Man” shouting inside our head, always echoing what we already believe in. The more you feed it with information that you already believe in, the stronger that voice becomes.
Why is it so difficult to change our mind? Probably because we are mentally lazy. It's much easier to seek evidence or information to confirm what we already believe, than actually work hard to get evidence or information that disconfirms what we already believe in.
I realise that you can only expect to minimize the mistakes made or the harm from the mistakes being made. You cannot eliminate biases. Now that I understand what the Confirmation Bias is all about, I try to minimize it.
When I go through my investing journal or through my checklist, I can track how often I fell prey to this bias. When I look back in hindsight and I show myself the mirror, I realize that the mistakes or the quantum and magnitude of mistakes, that caused me huge problems in the early part of my career as an investor, have reduced. This is because I'm aware of what's causing the problem.
It's all about awareness and minimization, NOT elimination.
Raunak Onkar
Head of Research and co-fund manager, PPFAS Mutual Fund
One bias I have combatted successfully is the Hindsight Bias.
You may have never thought about an event occurring, but it occurs. And you suddenly, somehow connect it in your own thoughts and believe that it is something you thought about a long time back, and it has now actually happened. But there is no evidence in reality whether you have actually thought about it or acted on it.
The only evidence you have is what is in your portfolio at any given point, and how you acted in the past when the information was there. And the evidence of you writing it down along with the date.
I write notes about my investment decisions and investment ideas. So at particular points in time, my thoughts about a company or sector are documented. This is a reference point as to what I actually thought about. The risk assessed. And how it played out.
If you write things down with dates, it's very hard to lie to yourself. It could just be a few lines. It helps to eliminate this Hindsight Bias quite effectively. Sometimes, I go back 5 years and I realize that I was such an idiot to think in such naive terms. Or, maybe not when I see how it all played out. You gain confidence, you see your progress and it keeps you grounded.
The bias I struggle with and find it hard to eliminate completely is the Confirmation Bias.
We want to believe what we want to believe, no matter what facts are in front of us. We pick and choose the facts that suit our argument.
This is where the environment in which you work in plays a very big difference. In the movie Departed, Jack Nicholson says that he doesn’t want to be the product of his environment. He wants the environment to be a product of him. In reality, we cannot shape our environment. We are constantly being shaped by our environment.
Accept it and start working with smart people. Involve them in the decision-making process. This is what I am thinking about a particular idea. These are the data points that I have read. The moment you begin to verify if the information makes sense or not, and start bouncing off ideas with your team, the confirmation bias lowers.
Others weigh in with their experience. Make you look at different scenarios. What about this? What if this happens? Your mind starts to open up to possibilities which you may have accidently ignored. You may have a blind spot to those risks or opportunities.
In any healthy investment team, there’s always presentation of ideas and debate. So the environment helps you question yourself. If you don’t take it personally and just learn from all the questions, it helps in curbing the bias, but not eliminating it completely.
Aswath Damodaran
Professor of Corporate Finance and Valuation, Stern School of Business, NYU
I am not objective, but I am open about my biases. Anybody who ever claims to objective is right off the top lying. None of us as human beings are capable of being objective. All we can do is be open about our biases. I am open about my biases.
I don’t think you ever fully overcome a bias because it is in-built. It is in your DNA. All you can do is be aware of it.
I love Apple as a company. I have loved it since 1981 when I first bought it. And I struggle with that love every time I value that company. I can’t make it go away. But one of the things I can do is step back when I make a choice and ask myself if I made the choice because I like Apple as a company or made the choice ou are never sure. That’s why this is a process.
I have a 5-step framework to value companies. I start with a story because I want to start with my weak side. My strength is being a number cruncher, so I build on my weak side first. I convert the numbers. I come up with a value. Then I keep the feedback loop open.
Show the valuation to people who think least like you. We tend to hang out with people who think like us. They go to the same schools. They read the same books. They use the same models. Unsurprisingly, we tend to agree with each other all the time.
I am lucky to have readers who come from very different backgrounds. They may not be finance people. They may not even be in business. So I get feedback from people who do not think like me. And I have to be careful not to shut them out but to listen to the things they say. Not to say “Look, I know valuation and you don’t”, because that is a very elitist view.
The only way to keep yourself honest is to hang out with people who don’t think like you because they force you to re-examine what you take for granted.
Vetri Subramaniam
CIO, UTI Mutual Fund
When I started my career, I was a lot more focused on errors of commission. I was worried about buying the wrong business and suffering in a capital drawdown.
Over time, I have come to realise that in equities, the payoff is asymmetric. If you put Rs 100 in a company, you can lose only Rs 100. But the upside can be 3x, 4x, 5x or 10x. So what has really troubled me in my career have been the errors of omission – because a good business did not come into my valuation discipline. That I can still live with. What has pained is when I have let go of a great business way too early. Early in my career I was too worried about valuations. I let go of some of my best investment opportunities too early.
I have had to rejig my thought process to around “once you identify a good company, how do you ride it”? Mid way through my career I arrived at the thought process of saying that it is important to buy a business at a valuation that gives me comfort but I am happy to own a business if it is doing well, even if the valuations get slightly overextended. However, I cannot ignore risk. So I manage risk by looking at position sizing. I had to build this parallel thought process, which I sometimes think it made me schizophrenic – when you make the investment, you want valuations to be in your comfort. But to get the benefit of those investments, you’ve got to learn to stay invested even when those valuations give discomfort.
Learning how to handle this schizophrenia is what makes for a good investor.
