The Tale of the Smart Investor
In the bustling city of Mumbai, there lived an investor named Raj. Raj prided himself on his keen eye for stocks. Over the past year, he had seen his investments soar. The Nifty 50 was up 30%, the NSE 500 by 40%, and the small-cap index by a whopping 60%. Raj often recounted tales of how he had meticulously analyzed financials and management to pick stocks that had now tripled or even quintupled in value.
But let's rewind to the beginning of 2023. Back then, Raj wasn't feeling so confident. The Nifty had returned a mere 4% in 2022, and the small-cap index was down. His investments in Nasdaq ETFs and crypto assets from the 2021 boom were staring at a 40% loss. Raj blamed the US Federal Reserve's interest rate hikes, the Russia-Ukraine conflict, and the subsequent spike in commodity prices for his misfortunes.
Raj's friend, Anita, reminded him of the time he had invested in small caps during the 2017-18 boom. By the end of 2019, the small-cap index had plummeted by 65%, with many stocks down by 80-90%. Raj had cursed stock operators and shady managements back then.
Anita pointed out a pattern: Raj attributed his successes to his skills and his failures to external factors. This self-attribution bias wasn't unique to Raj; it was a common human trait. When Raj landed a job, he believed it was due to his talent and qualifications. But if he didn't get the job, he blamed the interviewer or other external factors.
In investing, this bias led Raj to overestimate his skills during bull markets and blame bad luck during downturns. This overconfidence resulted in taking on excessive financial risks, aggressive trading, and concentrated portfolios. Raj's refusal to acknowledge his mistakes meant he was doomed to repeat them.
Anita reminded Raj of the saying, "Don't confuse brains with a bull market." She emphasized that both success and failure in investing involved an element of luck. Raj needed to recognize this to avoid overconfidence and make better investment decisions.
How do you balance recognizing your investment skills with acknowledging the role of luck in your successes and failures?
