Biases have a strong influence over our decision-making capabilities and can distort the result of our decision. What is more astonishing is that we are unaware of our prejudices that can influence our choices under most circumstances. While our experiences and personality may be an enabler for most of our life-based decisions, these same two factors can adversely affect our investment decision process.
How do we overcome our biases to ensure our investment decisions are free from prejudice and financial pitfalls?
Familiarise yourself with the terrain
How narrow or wide is your field of vision for your investments?
As an investor, your terrain or playing field for investments is across the Indian economy and the Global Economy. While you scrutinise your terrain, an investor’s primary focus must be to assess a business and its future growth prospects; base this on a business’ ability to leverage human ingenuity and innovation.
Did you know nearly 99% of Indian investors are biased towards investing in domestic markets? This is better known as familiarity bias or a home bias.
According to a BCG report, here are the top 10 innovative companies of 2021 :
How many of these companies are available on the Indian stock market?
During 2020, a portfolio invested in last year’s 50 most innovative companies outperformed the MSCI World index by 17 percentage points .
Isn’t this proof enough that innovative companies have resilience and the ability to accelerate out of a crisis? Strong leadership added to this innovation equation can help these companies catapult their growth even in the worst market conditions.
Can you differentiate between fact and opinion?
Are you aware of the factors that erode your investment gains? Inflation, market volatility, taxation and personal biases are factors that have a hold over your ability to better your gains. An in-depth and better understanding of factors like inflation, taxation and market volatility on your investments can assist you in gaining a broader outlook of the market and helping you make more informed investment decisions in future. For instance, understanding the direct effect of rising inflation on interest rates and the knowledge that inflation will rise in the short-term places you in a better position to direct your investments accordingly. Similarly, keeping a close check on your personal biases will help you cut out the noise in the market and avoid knee-jerk reactions while letting you focus on facts rather than opinions. This ability will set you apart as an investor and save you from blindly following the herd.
A classic example of herd mentality is the recent case of a 200% share price surge of Bombay Oxygen Investments . While the current pandemic has created a massive rise in demand for oxygen, some investors have blindly followed the herd and invested in this share in hopes of gains from a rally. While the business is a registered NBFC institution, it’s the company’s name that has been the main reason for its surging price. Investigations may be in order to check for manipulation of share prices to dupe gullible investors.
Objectives of investing
Is your next investment decision aligned to your priorities?
Do you have S.M.A.R.T goals? Planning is the key to your success as an investor. The lack of proper planning, which we refer to as financially mapping your goals to your investments, leads to a haphazard investment process. Investment pitfalls arise from unplanned investment journeys. The decisions to stay invested or pull out of the market during market volatility becomes easier if you are well aware of the timeframe and a goal of that specific investment. This knowledge gives you the ability to make informed decisions. Pay keen attention to the insight and actionable intelligence you amass while you study your investment opportunities before investing. Investors need to be aware to avoid bias decisions based on recent trending news or past losses.
In our next blog, we discuss four more ways of overcoming your biases to ensure your investments stay on track.