What’s on your mind?

When I watch senior investors talk, one of the things that stands out is: to be a better investor, you have to train yourself to be a better thinker. We humans have many flaws, shortcomings and biases and therefore we are prone to making many mistakes in our thinking. And hence the training to think and analyze better.

My friend and I have collected over 500 case studies of errors in human judgment including some of our own. This serves as an active reminder of our shortcomings and a call to think better.

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I live in Bengaluru. It has a pleasant climate for 10 months in a year; the other 2 months are usually hot (say about 38 deg C). For those 2 months, all people can think of is the heat. I have lived in places where the temperature would go to 45 deg C and we lived in college hostels without ACs. So I say with some experience and humility, 38 deg C is not that hot.

But like I said, all that people in Bengaluru can talk about during summer is the heat. The talk starts in April and stops by end of May when the Monsoons start. You don’t hear a peep after that.

And one of the things that people do during summers is they buy Air Conditioners. In fact, in the peak of summer is when the AC sales too hit the peak. Why does this happen?

Because when people feel hot is when they think of ACs
And when people don’t feel hot, they don’t think of ACs

(I know, I know, I know… I am stating the obvious. But trust me, in my limited experience as an investor, I have found good/great businesses at throwaway prices simply because the market was obsessed about something else and not thinking about them. )

So, I started asking myself: when should you buy an AC?

Summer is a season and it occurs without fail. So just as day follows night and night follows day, summer follows winter, without fail. So wouldn’t it better to buy ACs in say winter? The AC prices would be lower because the demand would be lower and the retailers would be happy to get rid of their stock etc. It’s not a product that changes much from year to year or a product that deteriorates just because it has been sitting in the warehouse. Hence, the better time to buy an AC would be in winter. But that requires us to go against our ingrained thought patterns…it would require us to think of ACs when it’s not hot. (See, I may have saved you a few thousand Rs already.)

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The people who have studied behavioral psychology the most, after behavioral psychologists themselves, are marketers and politicians.

Studies have found that people are more likely to pay for Terrorism Insurance than Plain Insurance (which also covers Terrorism Insurance). Why? Because when Terrorism occupies our minds, all we want to do is to protect ourselves like taking insurance policies. And in the process we do something irrational like paying more for Insurance policies that specifically address Terrorism instead of paying lesser for ones that cover everything, including terrorism.

Recently a friend remarked “we are going to become a Muslim country”. Why was she so Islamophobic? Because a certain big politician remarked something. Once the remark was made, all our minds were just occupied with that one thought.

But according to the data published by Ideas for India, it says that fertility rate among Muslim women (4.4 to 2.4) has fallen even more sharply than Hindu women (3.3 to 1.9) between 1992 and 2019. (These are national averages, so I am speaking about the country in general). Once the fertility rate falls below 2.1, the population will start to decline in about 30 years. So- yes, a slight shift in proportions may happen (say a drop from 78% to 75% of Hindus ) because of the demographics but it is not as dramatic as my friend thought it will be.

Like I said, a strong opinion can edge out rationality.

We see investors making the same error in judgment, all the time. We see all defense companies’ share prices going up, and we want that. Sometime back it was companies in the Electric Vehicle supply chain and we wanted them. Before that it was platform companies- the asset light online market places and before that it was maybe Chemical companies.

At the height of a boom in say Public Sector companies stocks, Mutual Funds would launch a Public Sector theme based fund. The mutual fund companies are in a business too and they are here to sell what’s on your mind.

Here is a funny anecdote. During April of 2021, we were under the 2nd wave of Covid and the country was under a severe shortage of Oxygen. So, investors were obsessed with Oxygen shares….that is -companies in the Oxygen supply chain like cylinder makers or Oxygen manufacturers. Anything and everything with Oxygen was being sought after. Even A company called Bombay Oxygen Investments saw it’s share price go up from Rs 10,000 in March 2021 to Rs 23,400 in less than a month. There was however a small catch. The company was into financing and not Oxygen!

Here is another example what we miss when it’s not on our mind. Or when it is not obvious. A business that I love and was an investor in the past is Aavas Financiers. It lends money to people buy/ build their own homes. While the market was obsessing over Fintech companies, here was a profitable finance company that has leveraged technology to the hilt (Geo coding, Digital loan applications, AI for lead scoring, AI for bounce prediction, data scrubbing from Credit Bureaus etc). I thought that was Fintech but the market was saying it’s not Fintechy enough.

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What’s on our mind is what we see. What’s not on our mind, we miss. So, I ask that you to not be carried away with the flavor of the season or mood of the day, because by doing so we would either end up paying more (like for insurance) or missing an opportunity (for investing) or coming to wrong conclusions. On the other hand, news channels, investment experts, marketers, politicians, Insurance and Investment sales people will want you to be swayed for in your frailty lies their opportunity.