Two books. One goal. A better life.
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“This is a masterpiece.”
—Organ Housel, author, psychology of money
“Discover the extraordinary on the inside.”
–Manish Chokhani, director, Enam Holdings
The internet is full of sources that proclaim: “Almost everything you believed about investing is incorrect.” However, there are much less that the aim is to help you become a better investor by revealing that “much of what you think you know about yourself is inaccurate.” In this series of reports about the psychology of investing, I will take you through the journey of the greatest psychological defects that we suffer from that we make stupid mistakes in investing. This series is part of a joint investor education initiative between Safal NiveShak and DSP Mutual Fund.
A group of tourists visited a dinosaur museum. A guide was entertaining them with interesting trivia about different dinosaur species. Just when they passed by a huge skeleton of an old carnivore, a curious member of the tourist group De Gids asked: “How old is this skeleton?”
“Oh, that big T-Rex skeleton? It’s about 100 million and 5 years old.” The guide joked.
“That’s a pretty strange figure. I understand 100 million part, but how do you know for sure in the last 5 years?”
With all seriousness, the guide replied: “Well, that is the most accurate part of the figure, because a world -famous expert in the field of dinosaurs told exactly 5 years ago that the skeleton is 100 million years old.”
The guide was honest in his attempt to provide accurate information, but he confused accuracy with precision. His answer was exactly, but was it really accurate? In fact, a better question would be to ask: Has the guide made the expert’s answer more useful by making it more precisely? I think no.
Sir John Maynard Keynes said:
Better roughly good than exactly wrong.
When it comes to investing, Precision has much less practical application than a new investor would think. This tendency to look for precision where there is no human bias. Charlie Munger called it Physics Envy.
In his lecture from 2003 about AcademicMunger said:
I think it is of the opinion that economy can prevent many of these problems that arise from the envy of physics. I want the economy to take the basic ethos of hard science, the full allocation habit, but not the desire for an inaccessible precision that comes from the envy of physics. The kind of precise, reliable formula that includes the constant of Boltzmann is generally not going to happen in the economy. Economy entails a too complex system. And the desire for that precision in physics style does little, but brings you into terrible problems … Economy should emulate the basic ethic of physics, but the search for precision in physics-like formulas is almost always wrong in the economy.
Our Spirit is connected so that it hates ambiguity, and everything that cannot be measured by assigning an accurate number feels ambiguous to the human brain. Psychologists call this ‘ambiguity saversion’ – we prefer the comfort of a wrong but accurate number over the discomfort of an honest ‘I don’t know’. That is why many investors prefer to stick to a target price until decimally than to allow the wide range of possible results.
In Poor Charlie’s AlmanackPeter Kaufman writes –
Charlie strives to reduce complex situations to their most basic, non -emotional foundations. But within this pursuit of rationality and simplicity, he is cautious to avoid what he calls ‘physics’, the common human desire to reduce enormously complex systems (such as those in economics) to one-size-fits-all Newtonian formulas. Instead, he faithfully honors Albert Einstein’s warning: “A scientific theory must be as simple as possible, but not easier.” Or in his own words, “what I am against is very confident and the feeling that you know for sure that your specific action will do more good than damage. You have to deal with very complex systems in which everything has interact with everything else.”
This caution reflects a greater truth in decision -making. Most Real-World systems are ‘complex adaptive systems’. Markets, such as ecosystems, constantly change as participants respond to each other’s movements. The moment you find a neat comparison to describe it, participants change their behavior and invalid the formula. That is why investing on a neat quantification in a way physics does not.
Paul Graham, a very successful venture capitalist and founder of Y-combinator, in his beautiful book Hackers and painterswrites:
Everyone in the sciences secretly believes that mathematicians are smarter than they are. I think mathematicians also believe this. In any case, the result is that scientists tend to make their work appear as mathematically as possible. In a field like physics this probably doesn’t do much harm, but the further you get from the natural sciences, the more a problem it becomes. A page with formulas just looks so impressive. (Tip: use Greek variables for extra impressions.) And so there is a great temptation to work on problems that you can formally treat, rather than problems that are important, for example.
Excessive quantification is the norm in physics and mathematics, but dangerous in investing. If you look at figures in investing, always ask what they mean and in what context they had arrived.
A cash flow (DCF) with a discount (DCF) can give you a rating of two decimal places, but if your growth assumption is switched off by 2%, the entire model will collapse. It is as if you are using a ruler with millim meter markings to measure a moving object. The precision is an illusion!
Making investment decisions includes dealing with many moving parts, including but not limited to human behavior, market conditions, competition, future prospects and industrial dynamics. Which means that it is almost impossible to accurately predict the final result. Trying to place a lot of false precision in a complex system such as the stock market is the source of serious errors.
There is a famous saying in the value -investment community: More fiction is made with the help of Excel than Word.
Excel, or other spreadsheet software, is a dangerous tool. Too much trust in Excel-powered models can deduce your attention from things that really matter.
Benjamin Graham instructed:
Price is what you pay and value is what you get.
As a value investor is the first thing I have learned to ensure that I do not pay more than the intrinsic value of a company. Now this is a challenge. We are asked to compare the price that can be measured precisely, with the value that is largely an estimate, ie inherently inaccurate. But most new investors try to do that, ie, try to achieve an accurate number for intrinsic value. It is a classic case of physics Afrakunst in action.
Even some of the best investors I know accept Fuzziness. They do not hide behind a “magical number”, but work with series, opportunities and safety margins. This is a psychological discipline: learning to remain humble for uncertainty instead of force false clarity.
If you are a long -term investor, the target price is a misleading number to follow, because the accuracy of the target price builds up a false sense of trust. And this false trust makes you vulnerable to serious mistakes.
Consider reports from analysts with target prices such as “£ 734”, as if the market will reward such accuracy. In reality, these goals play more for human psychology (our desire for precise anchors) than for the messy truth of business value. Kahneman and Tversky showed how powerful anchoring bias can be: as soon as a song is given, no matter how random, people treat it as meaningful. Target prices use this very weakness.
We are not mentally wired to be able to handle this counter -intuitive aspect of investing. That is why most of us never achieve a considerable return on the stock market. And that is why the best strategy for most of us is to invest through investment funds.
But even investment investors are not immune to the envy of physics. Many chase funds with the “best” return of 3 years or 5 years to the decimal point, assuming that performance figures from the past contain hidden precision about the future. They compare the cost ratios as if a difference of 0.1% will make or break their financial future, while ignoring much larger factors such as discipline, assets allocation or behavior during the decline of the market.
The truth is: whether you invest directly in shares or through funds, you are still human. And being human means being susceptible to prejudices. That is why the most important investment you can make, building the awareness of these psychological trials and the search for help with navigation. Just like a fund manager can help you diversify your portfolio, a teacher, mentor or adviser can help you diversify your thinking of dangerous prejudices.
So if you enter the stock market, you know, despite any warning you have ever heard, that physics -Jealousy will wait for you, such as an invisible pothole that you only notice after you have already stumbled. And if you comfort yourself by saying “No, no, I just stay with investment funds, that’s the safer way,” Well … sorry. Biases don’t really care in which vehicle you drive. They drive along anyway.
The real benefit in investing does not come from haunting a perfect number that you have pressed from Excel, but comes from the shoulders and admit, “Don’t know.”
It’s not easy. You have to learn to sit with the blurry instead of the comforting precision of absolute values. You have to leave yourself space, a margin, because you will be wrong more often than you want to admit. And the liberating truth is that investing will never give you neat answers. In the best case, it hands over your uncertainty in stories and figures. But if you are patient, and just a little modest, you start to see that uncertainty is not a curse – it’s the whole game.
Safeguard: This article is published as part of a joint investor education initiative between Safal NiveShak and DSP Mutual Fund. All investment investors must go through a one-off KYC process (Know Your Customer). Investors may only deal with registered investment funds (‘RMF’). For more information about KYC, RMF & Procedure, visit/ repair complaints dspim.com/ieid. Investment investments are subject to market risks, read all schedule -related documents carefully.
Two books. One goal. A better life.
🎁 Now available at special prices!
“This is a masterpiece.”
—Organ Housel, author, psychology of money
“Discover the extraordinary on the inside.”
–Manish Chokhani, director, Enam Holdings
#Psychology #Investing #roughly #wrong #Safal #NiveShak