Demystifying an Investment Bias: A Guide for Investors
The story of three blind men and an elephant is a story of a group of blind men who have never come across an elephant before and who learn and imagine what the elephant is like by touching it.
Each blind man feels a different part of the elephant’s body, but only one part, such as the side or the tusk. They then describe the elephant based on their limited experience and their descriptions of the elephant are different from each other.
The one who touched elephant’s tail thought it to be a rope. The one who touched its leg thought it to be a tree trunk and the one who touched its stomach thought it to be a wall.
The moral of the story is that humans have a tendency to claim absolute truth based on their limited, subjective experience as they ignore other people’s limited, subjective experiences which may be equally true.
We have all heard of this story but what has this got to do with investing?
This reflects a very common problem people make with investing. This is evident when we as investors are trying to pick stocks.
For example – if a company is growing its profits by 25% then it must be a good investment. But what if its way overvalued and future growth is already built into its price.
Or what if its competitors in the sector are growing at a much faster pace? Or what if the price is trading in a range and might continue to do so for few more quarters?
This is the problem with stock picking as well. Retail investors usually do not have all the available information or even if the information is available, they don’t have the skillset to analyze that. Most of the investors are skilled at just one of the following skill. Either they are good at technical, or they are good at fundamentals, or they have a good understanding of macro fundamentals. This is a huge time consuming task.
When we were working on research for what eventually was launched as Gulaq portfolios, we were focused on ethos of Parag Parikh Financial Advisory Services (PPFAS). Focus on a single scheme or handful of schemes (not a thicket of schemes like the rest)
That was the guiding principle behind Gulaq.
Gulaq’s portfolio approach is that we as fund managers try to look at the complete picture and not only technicals (we being a team of engineers mostly) but also fundamental and macro factors like interest rates, inflation, oil prices etc.
Because we use quantitative algorithms to help us analyze the data, we are able to process large amounts of data which could impact the markets and that too at a speed which no humans can match.
This has resulted in Gulaq’s performance beating the benchmark both in bull and bear markets.
The most important learning one can take away from the story is that one should try to pick funds which are broad based multi-cap funds.
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