Friday, 26 July 2019

What To do in the Equity market now?

In recent times, if the sea of red on your portfolio statement is prompting you to lose faith in equity investing, your mind is telling you to stop your SIPs and go back to FDs, just remind yourself of, why you began to invest in equity in the first place.

If you started your equity-fund SIPs to save up enough for buying a home or to fund your child's college degree or to retire early, will moving away from Equity help?
Do you need the money immediately?
What are the alternatives?
Have the fundamentals changed for the long term? 

The last few quarters have been rather gloomy for Equity investors. Commentators have been promising markets will improve after the Elections, then saying improvement will come after the budget, some saying after the trade wars settle down or when the earnings start improving. It has now reached a stage where the doomsdayers are predicting a major crash, everyday the social media is loaded with impending corporate scandals, repeat of Lehman crisis and God knows, rumours of how many companies going bust. 

Markets have always been dynamic, the path they follow is never linear and markets change every hour. However, human nature barely changes.

The price of a stock is still determined by people. As long as people let fear, greed, hope and ignorance cloud their judgment, they will continue to misprice stocks and provide opportunities to those who rigorously use simple, time-tested strategies to pick stocks. Names change, Industries change, technology disrupts, Styles come in and out of fashion, but the underlying characteristics that identify a good or bad investment remain the same. 

It is extremely difficult to go against the crowd—to buy when everyone else is selling or has sold, to buy when things look darkest, to buy when so many experts are telling you that stocks in general, or in this particular industry, or even in this particular company are risky right now. Investments start looking dangerous when the Macros or the economy as a whole may appear to be slipping. But, if you invest where everyone else is investing, buy the same securities everyone else is buying, you will have the same results as everyone else. By definition, you can’t outperform the market if you buy the market. And chances are, if you buy what everyone is buying you will do so only after the story is over and it is already overpriced.
















Historical Data as per the details below, shows that every correction is an opportunity to buy and those brave enough to put their money in a downturn get handsome returns.


Investors don’t differentiate and behave as irrationally after protracted bear markets as they do after Bull market manias; buying at or near the peak and leaving the equity markets in droves, usually at or near the market’s bottom. By the time they gather enough courage to venture back into equities, a major portion of the recovery has often already happened.
Most Investors Spend 90% of their time thinking the next 5 - 10% Index Move,  while wealth is created only by investing for the long term and catching long term trends.
We all love forecasts and always look for bits and pieces of information which basically reinforces our hypothesis regarding the market. This is what is called Confirmatory Bias and we all suffer from it.





















(Check out our earlier blog on the subject : “Market Forecasts - Kaisi lagti hai market” https://www.sahayakassociates.in/resources/our-blog/2553-sahayak-associates/sahayak-associates-blog/8558-market-forecast-kaisi-lagti-hai-market-2 )

We are always trying to second guess the market, but the facts are clear—there are no market timers on the Forbes 500 list of the richest people, whereas most of them are long term investors.





















At different times there will be different reasons for volatility in the market. It is important to recognize that and attach the requisite importance to market valuation.

Past performance is not indicative of future returns – Most mutual funds and investment houses put forth this disclaimer. But past performance and by that we are not talking about recent past, but historical data, is an important parameter to consider while investing. You cannot ignore historical performance by saying “it is different this time”. Historical data gives some idea of the asset class and the trend of returns given by the investment in a particular asset class over long periods of time.

In finance, the theory of “Mean Reversion” suggests that a stock's valuation or the market valuation will tend to move to the average valuation over time. Every asset class has an average, or fair value. Whether the current value goes much higher or drops dramatically from that level, the market will eventually move it back to the average or reverse it to the mean. It’s a matter of when and not if. Hence if the market is trading much above the mean, it will have to correct and if it starts trading much below the mean, it will gain and reverse to the mean.

People invest in Equity and they look at the price the next morning and next month and next year and they decide to see if they are doing well or not doing well. They immediately start comparing with other asset classes; If I had invested this money in FD, it would have been 1.06X after one year and here I ‘am at 0.95X and so on.

The reasons for investing in Debt or equity or Gold are totally different and cannot be compared, then why compare the returns in the short run.

The equity markets grow in spurts, your investment may do nothing for two or three years and suddenly, it will double in the next two years, giving you your 15% CAGR as against the 6 - 7% in fixed income securities. Historically, a 10 – 15% correction usually lasts for about 3 to 4 months – the market then bottoms out and up trend resumes. When the market falls more than 20%, the correction is termed as Bear market. A bear market is more severe than a correction. A bear market usually takes a year to bottom out and start recovery. In the last 12 years, the market fell more than 20% in 2008, 2011 and 2015 / early 2016. Since 1991 we have had seven bull markets and six bear markets of varying time periods and intensity. 

(Check out our earlier blog on the subject : When will this correction end

Everybody is a genius in a Bull Market, but one’s wisdom is only tested in a correction or a bear market.

I ’am reminded of the Golden words written by Benjamin Graham  more than seventy five years ago, “With every new wave of optimism or pessimism, we are ready to abandon history and time-tested principles; but we cling tenaciously and unquestioningly to our prejudices.”

Wealth creation from Equity is a very boring process, you have to have the conviction to ride the volatility, you have to be consistent, you have to have tons of patience, you have to leave your investment alone and not watch it change daily, and only then can you create wealth from Equity in the long run.


Stick to your asset allocation and do not try to time the market.

Consult your financial advisor, stick to the fundamentals, go back to the basics on the Why of Investment and if the basics and fundamentals have not changed, then why change because of the volatility of the market.

Happy Investing!
Stay Blessed Forever

Sandeep Sahni


Note: All information provided in this blog is for educational purposes only and does not constitute any professional advice or service. Readers are requested to consult a financial advisor before investing as investments are subject to Market Risks.


About The author

Sandeep Sahni
Sandeep is an alum of IIM Lucknow with a Post Graduate Degree (MBA class of 1988). His also an alum of Shri Ram College of Commerce, Delhi University (B.Com. Hons. Class of 1985.)

Sandeep's investing experience and study of the Financial Markets spans over 30 years. He is based in Chandigarh and has been advising more than 500 clients across the globe on Financial Planning and Wealth Management.

He has promoted “Sahayak Gurukul” which is an attempt to share thoughts and knowledge on aspects related to Personal Finance and Wealth Management. Sahayak Gurukul provides financial insights into the markets, economy and Investments. Whether you are new to the personal finance domain or a professional looking to make your money work for you, the Sahayak Gurukul blogs and workshops are curated to demystify investing, simplify complex personal finance topics and help investors make better decisions about their money.

Alongside, Sandeep conducts regular Investor Awareness Programs and workshops for Training of Mutual Fund Distributors, and workshops and seminars on Financial Planning for Corporate groups, Teachers, Doctors and Other professionals.
 Through his interactions and workshops, Sandeep works towards breaking the myths and illusions about money and finance.He also writes a well read blog; 

He has also conducted presentations, workshops and guest lectures at Management institutes for students on Financial Planning and Wealth Creation.He can be reached at:+91-9888220088, 9814112988

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Sunday, 21 July 2019

The Abilene Paradox in the Investment World

Do you often feel that you are heading in a direction you may not want to, but you still head that way because you assume that’s where everybody’s going?

You want to observe traffic rules, but you see everyone ignoring the red light and you do the same. Someone breaks the lane while driving and the whole convoy follows suit making the jam worse. You and your spouse decide you must save money, but on a boring afternoon, with nothing to do, because there is a Sale going on, you end up shopping, buying something you didn’t want, assuming your spouse will feel good and later, you both end up being miserable about the wasteful spending.

Nobody wants to pay a bribe, but we think others will do so anyway, so we do it ourselves to avoid becoming victims of the system.

We all know we are burdening our kids with excessive studies, but we send them to JEE classes and special tuitions anyway as we don’t want them to be left behind in the rat race. We all scream about pollution and traffic, but we will not car-pool or take the public transport to work.

Why do we do this, is there any hidden logic behind this?

On my birthday a couple of years back, I wanted to take my family out for dinner. I asked my wife where can we go? Knowing that I like Sea food, she immediately said: “Let’s go to Swagath”

Both my sons nodded in agreement.

On return my elder son said: “I wish Papa had taken us to Mainland China – he loves Chinese food.”

“Or at least to Bar B Que Nation for the wonderful and unlimited spread ” added my younger one.

“Yes, I too would have loved to go Mainland China”, I said.

My wife looked surprised: “But didn’t we all unanimously agree to go to Swagath,” she asked.

I said sheepishly “You had suggested and I agreed, I didn’t want you to feel bad.” And both my children nodded in agreement.

Here were four people who of their own volition would not have gone to Swagath but collectively agreed to go there. 

A story quite similar to the original story played out in Abilene.

On a hot afternoon in Coleman, Texas, the family is comfortably playing dominoes on a porch, until the father-in-law suggests that they take a trip to Abilene, a town 53 miles North for dinner.

The wife says, "Sounds like a great idea." The husband, despite having reservations because the drive is long and hot, thinks that his preferences must be out-of-step with the group and says, "Sounds good to me. I just hope your mother wants to go." The mother-in-law then says, "Of course I want to go. I haven't been to Abilene in a long time."

The drive is hot, dusty, and long. When they arrive at the cafeteria, the food is as bad as the drive. 

They arrive back home four hours later, exhausted.

One of them dishonestly says, "It was a great trip, wasn't it?" The mother-in-law says that, “Actually, she would rather have stayed home, but went along since the other three were so enthusiastic.” The husband says, "I wasn't delighted to be doing what we were doing. I only went to satisfy the rest of you." The wife says, "I just went along to keep you happy. I would have had to be crazy to want to go out in the heat like that." The father-in-law then says that he only suggested it because he thought the others might be bored.

The group sits back, perplexed that they together decided to take a trip which none of them wanted. They each would have preferred to sit comfortably, but did not admit to it when they still had time to enjoy the afternoon.

 This is the Abilene Paradox.


This parable is often used in management training for many corporations This is a phenomenon, which also happens regularly in the Investment world.

Prof. Jerry Harvey calls it “The Inability to Manage Agreement”.

The Abilene Paradox occurs when a group of people collectively decides on a course of action that is contrary to the preferences of many of the individuals in the group.

Prof. Harvey states in his paper ‘The Abilene Paradox’: “Individuals frequently take actions in contradiction to what they really want to do and therefore defeat the very purpose they are trying to achieve”. This is the inability to manage agreement.

He adds: “The inability to manage agreement, not the inability to manage conflict, is the essential symptom that defines people caught in the web of the Abilene Paradox.”

The Abilene Paradox describes the situation where everyone goes along with something, mistakenly assuming that others people’s silence implies that they agree and the (erroneous) feeling to be the only one who disagrees makes a person shut up as well, all the way to Abilene.
In the Investment world, when the advisor throws an idea, e.g., lets invest in Debt Funds or Balanced Funds, or whatever is the “Hottest” theme, the investors immediately agree and invest there.

When the well known investor or a renowned fund manager, like Lets say Warren Buffet, and he says the market is not overvalued, we all tend to agree and follow, even though all valuation parameters may be pointing to the contrary. We tend to believe the Pink papers and the financial channels as the gospel truth even though our common sense may point otherwise.

Similarly if the bread earner decides, that Equity is the best investment class, other family members will agree despite the higher risk and lack of market knowledge, Or when the Grandfather recommends a Bank FD or a LIC endowment policy, as the best investment, the family becomes duty bound to invest some portion of the corpus in the recommended Asset Class, even though it may not fit in the Asset Allocation strategy.

This action is done because everyone in the group thinks he would look stupid if he disagrees and does not want to annoy the other person. He feels how can such trusted advisors and experienced hands be wrong and for him, standing out as a lone voice is very embarrassing.

Hence, this leads the group to decide on ‘yes’ when ‘no’ would have been the personal and the correct response of the majority.

 Individual group members fail to take action on their own beliefs because of the anxiety they experience about voicing opposing ideas. This action anxiety is fueled by a belief that voicing an opposing view will result in negative outcomes. This negative fantasy may be reinforced by events where individuals who voiced an opposing view were labeled as not being team players. If this occurred, a real risk does exist. The risk of being ostracized from the group results in separation anxiety. The individual copes with separation anxiety by agreeing with the group. This agreement is the psychological ­­­­reversal of risk and uncertainty.


Be careful of the unintended consequences of a Great Idea.

Consult your financial advisor to get the right perspective and arrive at the right decision. Don’t get stuck in the Abilene Paradox, Follow your strategy to achieve your goal & your dream. You can please people in other ways.

Happy Investing!

Stay Blessed Forever
Sandeep Sahni







Note: All information provided in this blog is for educational purposes only and does not constitute any professional advice or service. Readers are requested to consult a financial advisor before investing as investments are subject to Market Risks.

About The author
Sandeep Sahni
Sandeep is an alum of IIM Lucknow with a Post Graduate Degree (MBA class of 1988). His also an alum of Shri Ram College of Commerce, Delhi University (B.Com. Hons. Class of 1985.)

Sandeep's investing experience and study of the Financial Markets spans over 30 years. He is based in Chandigarh and has been advising more than 500 clients across the globe on Financial Planning and Wealth Management.

He has promoted “Sahayak Gurukul” which is an attempt to share thoughts and knowledge on aspects related to Personal Finance and Wealth Management. Sahayak Gurukul provides financial insights into the markets, economy and Investments. Whether you are new to the personal finance domain or a professional looking to make your money work for you, the Sahayak Gurukul blogs and workshops are curated to demystify investing, simplify complex personal finance topics and help investors make better decisions about their money.

Alongside, Sandeep conducts regular Investor Awareness Programs and workshops for Training of Mutual Fund Distributors, and workshops and seminars on Financial Planning for Corporate groups, Teachers, Doctors and Other professionals.
 Through his interactions and workshops, Sandeep works towards breaking the myths and illusions about money and finance.He also writes a well read blog; 

He has also conducted presentations, workshops and guest lectures at Management institutes for students on Financial Planning and Wealth Creation.He can be reached at:+91-9888220088, 9814112988

        Follow us on:
https://sahayakgurukul.blogspot.com https://www.sahayakassociates.in/resources/our-blog 
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Friday, 19 July 2019

The Curse Of Overconfidence in Investing!


I remember an old saying from my college days, “Confidence is I can Kiss My Girl Friend” But believing that, “Only I can Kiss my Girl Friend is Overconfidence.”

They say, “Confidence is good but Overconfidence always sinks the Ship” and the first thought that comes into our mind is the Sinking of the Titanic. TITANIC Was called the “UNSINKABLE” Ship.

An unknown Titanic crewmember is reported to have once said to embarking passenger, Mrs. Sylvia Caldwell, “God himself could not sink this ship!”
That was overconfidence and we all know what happened to Titanic on its maiden voyage.

The overconfidence effect is a well-established bias in which a person's subjective confidence in his or her judgments is reliably greater than the objective accuracy of those judgments.

In 2011, David Dunning wrote about his observations that people with substantial, measurable deficits in their knowledge or expertise lack the ability to recognize those deficits and, therefore, despite potentially making error after error, tend to think they are performing competently when they are not—an assertion that has come to be known as the Dunning–Kruger effect. In the field of psychology, the Dunning–Kruger effect is a cognitive bias in which people mistakenly assess their cognitive ability as greater than it is. It is related to the cognitive bias of illusory superiority and comes from the inability of people to recognize their lack of ability. 

The overconfidence bias is the tendency people have, to be more confident in their own abilities or situations, such as while driving, running a business, in investing or in sports and games etc., than is objectively reasonable. 

Surveys reveal that the vast majority of people rate themselves “above average” among their peers when it comes to positive traits, such as driving ability, employment prospects, in elections or life expectancy. In surveys, 84 percent of Frenchmen estimate that they are above-average lovers. In another survey, 93 percent of the U.S. students estimated to be “above average” drivers. 

Ironical isn’t it, because logically only half can be better than the average. Without the overconfidence effect, that figure should be exactly 50 percent—after all, the statistical “median” means, 50 percent should rank higher and 50 percent should rank lower.

We routinely underestimate the likelihood of falling ill for instance; yet, overestimate the probability of good events happening to us, which goes a long way to explaining lottery ticket sales. We also overestimate our ability to earn money and a main retirement mistake, which most people make, is overestimating earning years.

Most Entrepreneurs deem themselves to be different; they believe they can definitely beat the odds. In fact, entrepreneurial activity would be a lot lower if the overconfidence effect did not exist. For example, every restaurateur hopes to establish the next Michelin-starred restaurant, even though statistics show that most close their doors after just three years.

Research shows that the overconfidence effect is more pronounced in men—women don’t tend to overestimate their knowledge and abilities as much. Even more troubling is that Optimists are not the only victims of the overconfidence effect. Even self-proclaimed pessimists overrate themselves—just less extremely.

In a wonderful book I read recently, “Factfulness” by Hans Rosling, He did a small survey and asked some simple questions about Global trends, questions like, What percentage of people around the world are living in poverty, How many girls in low income countries finish primary school, what is the Life expectancy of the World today and so on. He proved how we systematically get the answers wrong and a majority gets them wrong irrespective of background, profession, education, etc. He went on to say that a Chimpanzee choosing answers at random could outguess journalists, Nobel laureates & Investment bankers.

Overconfidence results from the illusion of knowledge, which is the tendency in people to believe that the accuracy of their forecasts necessarily increases with more information. This however is not necessarily the case, given that information is not the same as insight. 

Today, investors are bombarded daily with financial information, and every twist and turn in stock markets is discussed at length especially on TV channels and social media. This deluge of information encourages some investors to make frequent changes to their portfolios. However, studies suggest that these investors are in fact overtrading and virtually guaranteeing themselves mediocre returns after transaction costs and taxation.

One explanation for overtrading is that investors feel motivated to master the environment -The illusion of control, which is the tendency to overestimate our ability, to influence events over which we have little control.

As a result of the overconfidence bias, the investors tend to be more active traders than required. They overestimate their abilities to value companies, predict movements, growth and move in and out of positions quite rashly and very frequently.

Overconfidence traps the investors in a vicious circle wherein they buy when they are confident, sell when they are afraid, completely miss the recovery part and jump back into the cycle as soon as possible. This makes them more risk-prone and also mitigates their gains.


Optimism is a perfectly sensible strategy for life but can be hugely problematic when investing. One of the Golden Rules of Investing is: Don't be overconfident. Every investment mistake is invariably rooted in overconfidence.

Overconfidence is called “the most significant of the cognitive biases.”
- The most damaging of biases that affect an individual is overconfidence.

No problem in judgement and decision-making is more prevalent and more potentially catastrophic than overconfidence. Overconfidence has been the main cause for, among many a disaster right from, the sinking of the Titanic to the subprime mortgage crisis of 2008 and the recession that followed it and many more such disasters.

What’s surprising is that the experts suffer even more from the overconfidence effect than lay people do. Let’s say if asked to forecast oil prices in five years’ time, an economics professor will possibly be as wide off the mark as a bus conductor. However, the professor will offer his forecast with lot of conviction and logic.

Another common trait due to overconfidence is the belief that, “This cannot happen to me, I have not done anything wrong, I have access to better information, so how can I be punished or make a loss,” forcing the individual to take greater risks and getting into unchartered territory.

In the investing arena, overconfident investors will risk far more money on a venture than their less confident counterparts. Overconfident investors will bet way too much on a particular stock or a trend. They might also hang on to an investment confident that it will bounce back even if the best decision is to square the position.



Recently, this was evident in Jet Airways, where individuals who were invested in the stock refused to exit because of their supreme confidence that the government will not allow such a big airline to fail. Same was the case with IL&FS, Yes Bank, DHFL & ADAG Stocks and what did the investors end up doing? They were trying to average the stock at every fall in price and ended up losing a large chunk of money.

Overconfidence gives us the courage to act on our misguided convictions and this leads to suboptimal investment behaviour.

Why do we fall prey to the narrative of overconfidence? It is mainly because we don’t want to be proved wrong, because we are innately averse to uncertainty, because we have an extremely high opinion of our intuition and knowledge.

Two behavioral traps especially set up an investor for overconfidence: The Hindsight bias and the Extrapolation Bias. 

"Much like our human predisposition toward nostalgia about the past, where we only remember the good times and gloss over the bad, investors likewise tend to take a nostalgic view of their past winners but forget about their past losing investments," That's hindsight bias.
Hindsight bias can feed confidence levels further. By extrapolating recent experience into the future, often based on limited data, investors are often guilty of making confident predictions that are regularly proven wrong. 

I know of many investors who may have made major amount of money on certain stocks over a long period of time but ignore the gross underperformance in the last 5-7 years in the same stock even though structurally that business model may no longer be relevant. They still hang on to the stock out of nostalgia and hope that it will outperform again. Airtlel, Castrol, PNB are just some examples of shares which were once the best of Blue Chips, but have not done anything in the last 10 years and have grossly underperformed.

Overconfidence becomes particularly problematic in bull markets and in periods of sustained stability. During these periods, the “good times” are widely expected to continue forever, and overconfidence becomes prevalent among investors.  

Indeed, our collective bias towards overconfidence in good times seems to sow the seed of our subsequent downfall. A leading Economist once observed, “Stability begets instability”. 

This can lead to extrapolation bias, by creating the illusion that you can predict market performance accurately. This behavior can become more pronounced if the portfolio has made significant gains in recent times.

Here, you need to remember, "Just because you were right a few times doesn't mean you'll be right again."

Overconfidence, especially the kind that doesn't reflect reality, is "the sin you don't want to be guilty of when putting your money at risk."

Overconfidence also causes investors to seek only evidence confirming their own views and ignore contradicting evidence leading to the Confirmation Bias.

Being overconfident of our investment skills can lead to many investment mistakes like:
A) Excessive Trading
B) Trying to average the stock purchase and time the market for best results
C) Concentrating assets and failing to diversify because diversification is only for those who cannot foresee the future
D) Buying risky investments because they believe they aren't really risky

Your best bet to overcome the pitfalls of overconfidence is not to act in haste, but to slow down your thinking, simply become aware of the pitfalls, and question whether you’re being overly optimistic.

Consider the possibility that you could be wrong. Listen to evidence that could possible change your mind. Be ruthless with your investment thesis; be open-minded and open to criticism of your hypotheses.

Finally, Consider the consequences of being wrong. Your first and foremost job should be not to lose money, Put your ego aside and balance your risk and return.

To avoid overconfidence in equity investing, you must remember that financial markets are not static but highly dynamic. Even the seasoned traders and fund managers, with access to the best research reports, algorithms and investment models, do not perform the best, at all times. Therefore, it is very important to remain grounded and realistic.

One of my favorite sayings is that “It isn't what a man doesn't know that tends to get him in trouble, but what he knows for sure but isn't true, that gets him into maximum trouble.

British philosopher, Bertrand Russell put it in another way, "The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt."

Averages never lie, Reversal to the mean is a time-tested formula, valuations matter, overconfidence kills; be a wary investor and you will never lose.

An experienced and balanced Financial Advisor is the best remedy for overconfidence while investing. He will surely put forth the different perspectives, make you aware of the risk and return matrix and keep you at arms length from excessive risk and the perils of overconfidence.


Happy Investing!
Stay Blessed Forever

Sandeep Sahni

Note: All information provided in this blog is for educational purposes only and does not constitute any professional advice or service. Readers are requested to consult a financial advisor before investing as investments are subject to Market Risks.

About The author
Sandeep Sahni
Sandeep is an alum of IIM Lucknow with a Post Graduate Degree (MBA class of 1988). His also an alum of Shri Ram College of Commerce, Delhi University (B.Com. Hons. Class of 1985.)

Sandeep's investing experience and study of the Financial Markets spans over 30 years. He is based in Chandigarh and has been advising more than 500 clients across the globe on Financial Planning and Wealth Management.

He has promoted “Sahayak Gurukul” which is an attempt to share thoughts and knowledge on aspects related to Personal Finance and Wealth Management. Sahayak Gurukul provides financial insights into the markets, economy and Investments. Whether you are new to the personal finance domain or a professional looking to make your money work for you, the Sahayak Gurukul blogs and workshops are curated to demystify investing, simplify complex personal finance topics and help investors make better decisions about their money.

Alongside, Sandeep conducts regular Investor Awareness Programs and workshops for Training of Mutual Fund Distributors, and workshops and seminars on Financial Planning for Corporate groups, Teachers, Doctors and Other professionals.
 Through his interactions and workshops, Sandeep works towards breaking the myths and illusions about money and finance.He also writes a well read blog; 

He has also conducted presentations, workshops and guest lectures at Management institutes for students on Financial Planning and Wealth Creation.He can be reached at:+91-9888220088, 9814112988

        Follow us on:
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