Wednesday, March 07, 2012

Iowa Gambling Task

Why do people invest differently? Why do some always lose money in markets and why is it some people refuse to lose money by not investing or postponing their decisions? Yet there are people, who are remotely connected to markets, inherit huge holdings and never do anything about it but they grow their wealth many times? Yet there are people who invest to lose money and never return?

It’s about how the brain is made and how we make different decisions to same situations. Recently I tried Iowa Gambling Task online to better understand my investing behavior. It tells you if are a carefree risk taker, or fear losing money in market, or are you the one who will take money away when the market tanks. Such investing behavior potentially inhibits your success. The task also reveals if your brain responds to low risk bets and limits downside, such behavior helps build reasonable portfolio returns. The wiring of your brain will manifest in investing decisions. If you are low on wiring as you can make out in the Iowa Gambling Task, it would be better for you leave your wealth management to professionals or invest through a market or index fund.

The investing part of the brain can't at times handle prolonged period of low return. We either kick ourselves for a poor decision or exit early causing irreparable investing damage. I had the opportunity to understand this recently when I met up with a well known Fund manager. He was legendary at one time for his multi-bagger picks like Sintex and Pantaloon. His funds were number 1 for years in a row. A bull by nature, he can't retain a negative opinion for long. He remembered investing in Pantaloon in the year 2002 and then the stock never moved for almost 3 years since. During that period it was stagnant hovering around Rs 10 per stock. But by 2005 or so the stock went up to Rs 300 per share. Now in retrospect would you say it was the right pick or not? Most funds could not ride the wave as they exited the stock owing to long stagnation at early levels. In the fund industry, if the fund manager does not deliver returns better than the index and peer funds for 2 quarters in a row, he will be axed. So it becomes difficult for him to stick to stocks like Pantaloon for 3 years without his investments delivering. As an individual investor, we are under no such pressure and hence can better an average fund-manager.

However as small investors with limited power to influence businesses, one key factor in investing is to look for companies with strong management you trust. As warren buffet said "I'm hunting for companies that have some kind of a sustainable competitive advantage, that have the kind of management I trust and that I can buy at a price that makes sense". The management who are transparent, have rewarded shareholders over periods of time, are trust worthy and those who know their businesses very well. They merit attention especially when they have done some mistakes or are going through unfavorable markets conditions as that is when you get the businesses at price that makes sense. I looked at 2 companies that are in such situations. Pantaloon moved on to reach dizzying height of 800 at the peak of the retail revolution and euphoria in late 2007 and early 2008. The company made so much profits that they wondered what to do with so all the money. Pantaloon attempted at multiple diversification which weekend the business and towards Jan 2012 hit a low of 125 per share. Pantaloon is run by management who know their business very well and they quickly got out of all thinly diversified businesses and are back to focus on core area of retailing. Recently when the FDI in retail bill was getting passed the stock shot up to 240 in one week and later lost steam as the FDI bill was shelved. The stock is back to 150 levels and is a potent stock run by well qualified management and when FDI in retail becomes a reality at some time, will benefit from it coupled with prospects of earnings & business growth. There are other great businesses run by management who know their business very well but have been battered by the markets due to short-term challenges that will pass by. Varadaman Textiles which was around 6000 crore in market cap is now 1200 crore, and is available at half its book value. Their fundamentals have not changed, nor have their management.

The secret of financial success is within us. If we invest with Patience and confidence coming from knowledge, we can take advantage of many situations around us and by refusing to let optimism or pessimism dictate our destiny. As Jason Zweig said, how our investments behave is much less important than how we behave.

1 comment:

Rahul Paliwal said...

Good One, Dear Naresh..However recent election can push our Sleeping Govt to take popular measure which can stop FDI or loose FII trust..That way Pantloon may remain silence for years again.