I read a fascinating blog written by Anish Teli about an interesting phenomenon that retail investors invariably load up on high beta stocks especially with negative news around them?
Anish argues that the reason (one of) for this is the concept called, “Lottery Effect”.
In laymen terms, it essentially means that due to emotionally charged set-up, you act according to possibility and NOT probability. We see that on Every Thursday (Weekly Expiry) where those Rs 1 options have the “possibility” of becoming 100 but a probability of less than six sigma.
Anish quoted a couple of interesting research papers exploring why the human mind likes a gamble and ignores the maths in “heat of the moment”.
He shared an interesting table. I am pasting it as is.
Then he moved on to the benefits of LOW VOLATILITY INVESTING and how it’s an ANOMALY worth exploiting.
I spoke with a couple of my friends (non-stock market background) to figure out what stocks are they stuck in and invariably as it turned out the top two names were Yes Bank and DHFL.
While all other factors and behavior biases mentioned in the blog and research paper hold true, my detailed interaction revealed a couple of interesting reasons why I think this plays out over and over again.
Availability Heuristic – Jo Dikhta Hai, Wahi Bikta Hai
These guys I spoke with did not run a screener to short-list their KACHRA. It was served to them on a platter.
I am of the opinion that Cigarette sales can be cut in half simply if all illegal vendors are abolished.
One of the reasons why in INDIA, cigarette sales are robust is because you are NEVER more than 5 minutes away from a cigarette shop.
(You know its the easiest business in town, migrate to a city, find a busy spot, capture the land, ITC provides the set-up and voila you are the owner of Asset light high ROCE business) but let’s not digress.
Coca-Cola works on the same premise. I was trekking in Alchi (Leh-Ladakh) and guess what while there were no motor vehicles for as far as my eye could see, but there was a shop selling Coke.
These guys are not from the stock market, they are not tracking individual stocks. So, there might be an end number of stocks that have fallen considerably in this correction but retail invariably loads up on the ones which are AVAILABLE. This availability provided by the media.
Value Gyaan and the Illusion of Easy
Another big reason why I feel retail gets rogered is the market-wide Gyan doing the rounds – BUYING LOW AND SELLING HIGH. Of how Warren Buffet and others did it and how Warren himself said IQ is not needed in this game.
Of how Mr. X was a nobody and because of his buying low and grit and patience, he is now financially Independent.
Of how instead of Maruti car, you should have bought its share.
Warren Buffet must be the most quoted person in the world. His AMEX trade is in the folklore now. I do not find hard to imagine retail finding correlations between that and Yes Bank.
Devil of-course is in the detail and unfortunately, status quo ensures nobody spends time exploring the nuances.
It’s Considered Easy
That’s a big one. Not only is it considered easy, but it’s also not even treated as a full-time career.
When my uncle asked me,”So what do you do, Manish?” and I replied, “I trade and invest in stocks.” He said, “Yeah even I do that, but what do you really do?”
You would NEVER demean any other business like stock market investing. Have you ever seen yourself asking the dentist to teach you how to pluck the teeth yourself so you don’t have to come the next time? Maybe this is an exaggerated example but you get the drift, right?
Because retail investors consider this as an easy thing to do, when a DHFL and YES Bank kind of opportunity comes along, they grab it with both hands 🙂