The irrational rationale

"The rulebook is not the same" - how often do you hear this, especially after appraisal letters are distributed or when an angry kid complains to the parents about their sibling? It's natural, all of us want an unbiased and rational treatment when we are the so-called victims.

But what if we are on the other side? Are we rational and unbiased?

In fact, let's leave behind the larger philosophy of life and instead focus on how we behave with money.

Our behavioural bias

In my interactions with many investors, while working in an asset management company, I often observed a dichotomy in behaviour.

We are all aware that our investments move in cycles. There are periods of highs and lows, and past performance is not an indicator of future returns. Yet, only performers (at the time) get all the attention. Every time a new kid is on the block, it is added to an investor's portfolio. All is good till the going is good. But hell breaks loose when it doesn't.

Ask any fund manager, distributor or advisor about the stress they face when an investor's performance is going through a rough patch.

I recently met someone who said, not verbatim, "Investors come with a 20 per cent-plus performance expectation. The run rate should be high, and there should be excitement all the way." To that, I'd say that an investment journey is not like a 20-over match. There need not be any excitement.

That person gave the example of an investor who was unhappy with the performance of one particular investment. It's important to mention that the investor knew there would invariably be a few good bets and a few that turned sour. He even thought he was a patient, long-term investor, not to be swayed by short-term excitement.
But no matter what most people claim, patience is tested and often wears off with each passing quarter of poor performance.

And that's what happened with this investor: His investment in the mutual fund scheme had not moved upward enough to keep him 'excited'. On the other hand, a few of his 'exciting' stocks had got delisted and were worth toilet paper. Here's how it happened (and observe the preferential treatment for the 'more exciting' stocks):

Stage I: He averaged down his purchase price while buying stocks. With every price correction, he added more stocks till it hurt to buy more with his hard-earned capital.

However, in the case of mutual funds, he made additional purchases only in the better-performing schemes.

Stage II: He soon got tired of the fund's poor performance. He complained about the fund manager and was critical of his investment calls.

He felt cheated even when the rationale of having an out-of-flavour investment style was explained to him.

Remarkably, the same person was patient with his poorly performing stocks. I thought the pain of losing money was the same, but with stocks, it seemed as if he had taken a shot of anaesthesia.

In this case, he needed no consoling. He had assured himself that it was a rough patch for the company and the stock would turn around.

Stage III: By this time, he needed money for a new investment idea. So he redeemed the fund, which did not perform for him, only to reinvest in a better-performing scheme. According to him, he had made an exit from a loser and put money on a winner.

However, in the case of stocks, he kept buying his slumping stocks until they went poof! His ego did not allow him to sell the losers and book a loss.

It beats me why we behave differently in these two situations - exit a non-performing fund but hold on to a losing stock. Perhaps, "the rulebook is not the same" indeed.

Shyamali has been navigating the asset management world for over 20 years, working with everyone from the seasoned super wealthy to absolute beginners. She has a knack for understanding the human side of investing and empathising with investors, something that shines through in her writing. She can be reached at [email protected]

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