Linking investment behaviour and ideas

Conversations are a great teacher; especially in the world of investing. Investors seek to meet peers principally to understand their thinking. Conversations could be centred around one’s investment philosophy, role models, values, experiences, performance, all-time favourite stocks, current favourites and one’s crystal ball view of the markets.

One seeks to meet a peer or a more learned practitioner with the expectation of learning something. A quizzical bent will always dominate such exchanges. An interesting facet in every conversation would be to observe who is asking the questions and how they are being answered. That would tell you who is in control of the conversation. Often, positions of the seeker and the respondent become evident very early into a conversation. A great conversation happens when both are astute, articulate and conscious learners.

How an investment conversation evolves tells you a lot about the participants. Conversations have a character that the participants lend to it. Entire investment books are written based on conversations. The most wonderful exposition of an investment conversation is the legendary Berkshire Hathaway annual shareholder meeting. Shareholders of the company and the Warren Buffett-Charles Munger team have created an institutional way of exchange, which has taught the investment world more than any textbook can ever accomplish.

Actually, the conversations at the meeting have themselves become textbooks of learning. While this is a public conversation and the personality of Buffett and Munger lend it earthy candour and an open style, they still may not really have much room for loud thinking. Political correctness is something no investor can ignore and there will always be things that one can’t state in a public conversation. A private conversation is different.

Private conversations can bring in more forthrightness and straight talk if the participants share the right comfort level. One carries much greater license if she establishes adequate comfort and requisite will.

This makes learning through private conversations very interesting. Highly accomplished investors carry a tendency to remain private. They are loathe to be seen talking in public. The recent past has seen the investment community engage more with private investors and to bring them out of their shell to share their views. Blogs have brilliantly recorded these conversations and shared them with the wider community.

These conversations always carry a strong contextual connect to the nature of views exchanged. The market and its current state dictate the tone and tenor of most such conversations.

Recency bias (the phenomenon of a person most easily remembering something that has happened recently, compared to remembering something that may have occurred a while back) is an unavoidable hazard as people always seek answers to what is affecting them then.

And when they meet an exponent, they want quick answers.

Conversations tend to broadly focus on two aspects—ideas and behaviour. Investors are obsessed most of the time with ideas.

In a bear market, most discussions will be centred on investment ideas. Often, investors would express wondrous amazement at the low valuations of a stock and the lack of investment appetite for it.

In a fairly valued market, investors would still seek to identify newer ideas that others haven’t found yet. There will be a faint hope that effort will prevail over ground realities.

In bull markets, investors seek confirmation of the great ideas that are all-time favourites.

They seek to create a new set of ‘infallible’ stocks and bull markets embolden them to promote stocks that have recently shown extraordinary price performance.

Conversations also come in handy to push one’s own ideas and savvy investors seek maximum visibility to achieve self-promotion.

Mistaking such conversations for knowledge sharing is an oft-repeated folly of new-age investing. We think that the words of an extremely successful investor ought to always be right.

Trouble starts when that investor, too, believes in such hubris. This is a routine bull market phenomenon.

Conversations on behaviour find no takers in bull markets. These topics are always reserved for bear markets when no hope is left and despondency is all around us.

Conversations have an uncanny ability of telling us where the markets are and how we should be viewing them.

When we get a few hundred ideas during a Diwali mahurat session, it is probably a good time to put them all aside and discuss behaviour. When peer investors are seriously discussing behaviour, that is the best time to switch and look for ideas.

Year 2016 saw investors discussing behaviour briefly in February and ideas for the rest of the year. The year saw obsessive focus on ideas, and a lack of good ones led investors to ideas that did not have sustainable potential. Future conversations will need to deal with the behavioural consequences of betting on these ideas.

We must learn to swiftly learn from our behavioural mistakes of 2016 and to focus on forward looking themes and ideas.

This year should be a definitive year for aligning our behaviour and ideas rightly. We must discuss and fix our behaviour so that we can move into the right ideas. Doing so will reap rich investment rewards for a long time to come.

Shyam Sekhar, chief ideator and founder, iThought