Investing, Path Dependency and Mental Barriers

I spent the last few days at my Sister’s place and returned home today. On the way, I picked up a packet of milk. Between where I picked up my milk and my home, I seem to have inadvertently dropped my purse containing a couple of thousand bucks in addition to other Cards and miscellaneous items that keep my purse fatter.

Today is also the day when a stock I hold dropped 10% (Selling Circuit). The loss in that stock alone is greater than what I lost in money terms today but I basically forgot that I had a loss today in the markets while the loss of my purse still boggles my mind. Did I drop it or did it fall off – what if I had left later in which case I may not have had to stop for milk or better still taken my father’s advice and taken another route which would have meant I would have missed the milk booth altogether and maybe would still have my purse in hand or what if.. You know the drill.

In Investing and Trading, we look at the past and wonder, what if I had done this and not that. The difference in outcomes is so enormous that we keep wondering what if everytime we hit a speed bump.

Active fund investors are ridiculed for buying closet index funds that at max provide the same returns as Index before cost. Post cost, most of them under-perform to the extent of the cost (Fee). But given the fact that selling Mutual Funds is a push business vs say Fixed Deposit at Banks which is pull, one wonders whether one should even compare the investor with a Index fund or should one consider the alternative he would have invested into – Fixed Deposit at a Bank.

One of the biggest risks in back-testing is that you end up building a trading system that worked great in the past but the future has no bearing with the past other than the fact that sometimes it rhymes. Having done thousands of tests on data, I found this tweet to be on the dot

Buying Quantitatively Cheap stocks worked for a while and then it stopped working. Fund managers though keep hoping that the trend is about to reverse. Apna time Ayega is basically what fund managers seem to be writing to their clients as the fund keeps disappointing compared to other strategies the money could have been invested into. Very few seem to question why it worked historically versus trying to prove why it shall work in future (which basically is claiming mean reversion)

One reason for Do it yourself investors to start favoring Index funds is because they are unable to reason out which of the 400+ funds will take the route that provides them with returns greater than what they could achieve by investing in the Index. There are funds that will definitely beat the Index, but finding them before has become tougher given the odds of failure which keeps raising.

Sometime back, there was a running joke that if Anil Ambani had invested into Nifty 50 instead of investing into all those companies, he would have been far more richer today than facing the law of the land with regard to bankruptcy procedures. The same joke is not said with regard to Mukesh Ambani for he has been much more successful. In 2005, when the family decided to split, I doubt anyone could have seen this forthcoming, but thanks to how we think, today it seems natural that Anil – the once flamboyant superstar would fail. As Annie Duke – You can’t use outcome quality as a perfect signal of decision quality, not with a small sample size anyway. 

When it comes to biases, it’s amazing how many of them hold us back from achieving our true potential. Every decision we make in life can be reduced to a binary – Yes and No. Each decision in itself is like a split from the main stem and can take a life of its own. Some decisions go right, some go wrong and while in truth we always have a 50-50 chance, it’s amazing how much time is spent on trying to understand the wrongs than the rights. 

A right decision in my case was pursuing a job in 2017 vs launching my own business. This turned out to be right. But in 2005, I decided the other way – pursuing a career in my own business vs taking up a Job I was offered. That in hindsight I tend to feel turned out to be a wrong decision  – not because of anything else but because my business failed. Knowledge of biases and fallacies alone is not enough.

Should I pursue a Business or take up a Job, should I invest directly in stocks or buy a Mutual Fund, should I buy an Index Fund or an Active fund. Should I hold a concentrated position of stocks or a diversified portfolio, should I pursue a strategy of Value or one of Momentum. The questions that investors face is mind boggling in nature and its no surprise many are concerned about whether they are doing the right things.

Each of the decisions we make is based on both our own biases which can get exaggerated by the company we keep and our own beliefs formed by actions of the past. The biggest regret of many investors is not having been invested in the right stock when they first started investing. 

A good friend passed me this tweet for instance

I have had a similar thought before. Wouldn’t it be amazing to have the incredible foresight that one has achieved today years back when one was just starting. It’s a question that has bothered me too but I came to the conclusion that even if I were able to go back in time and tell my younger self the greatness of Momentum Investing, I may have still failed. Not because the strategy is faulty but because my beliefs in the style of investing I focus today has been borne through the combined experience of years. 

In Investing, we can read through hundreds of books / blogs. But ultimately the path you take is your own and one that will not be smooth either. The only way to stay sane and continue despite the hurdles is to get a better understanding of both our losses and our winners while understanding the limitations.


There’s a difference between knowing the path and walking the path..

Writing this post has been one way to overcome the disappointment of losing my purse. I do hope that it provided some food for thought. If it did not, hopefully I can do a better job next time around 🙂

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