Know Thyself!

One of the world’s biggest investment research and investment management services’ companies did a study about how the average investor fared in a fund over a period of time. What they found is that an investor’s returns on an average are lower than the total return of the fund. This signifies that investors participated in the downside returns and less in the upside returns. One of the reasons is that investors chase returns and assets flow into a fund at its peak of performance. This effect is further accentuated when investors aim to break even and refuse to sell a losing fund.

It is not that investors have not done their homework. They have researched the fund, the fund manager and its past performance and only after that invested. However, they still have to settle with lower returns. The reason is that they fail to understand themselves and their behavioural biases. I believe it is important for investors to understand their cognitive or psychological biases that often lead to poor decisions on the timing of their investments. Understanding and overcoming your cognitive biases is a first step in refining the active investment process.

It will help you to take better investment decisions, lower your investment risks and ultimately lead to higher investment returns. Hence, it is not only important to understand the securities where you are investing; you also need to ‘know thyself’ to make profitable investments. Our cover story in this issue gives you details of some the most common behavioural biases while you make an investment, how these impact your returns and how you can overcome them. Traditional measures of investment decision making, though useful, fail to go very deep and develop the soft-skills required for a successful investor.

SHASHIKANT