In the film vantage point an assassination attempt prompts the agent to see the situation from multiple angles and vantage points to assess the situation with more precision.
Recently Franklin templeton closed down 6 of its debt funds leaving investors in a state of shock and panic.
The funds closed down are
1. Franklin India low duration
2. Franklin India dynamic accrual
3. Franklin India credit risk fund
4.Franklin India short term income plan
5. Franklin India ultra short term
6. Franklin India income opportunities.
The closure of these funds left investors particularly ( Debt scheme ) investors in a shock. The debt schemes invest in rated govt securities and bonds which was considered a safe investment and also with higher returns compared to FD. Investors’s invested in these schemes were shocked which caused a ripple effect to investors in other schemes too.
I have tried to analyze this situation from a vantage point.
Why is it wrong to think from just a single reference point ? This could lead you to a situation of “narrow thinking” which could impair your ability to think rationally.
Let’s see this issue from a multiple reference points.
1.Map is not the territory – FT closed down 6 funds on Friday and stopped withdrawals citing reasons to credit crunch and higher withdrawal pressure. Immediate response from the investors were shock and dismay. I Personally spoke to an investor invested in one of the other schemes in FT who wasn’t spared by the panic and said, I’m planning to pull out the investments in FT large cap funds.
What’s wrong with this reasoning ? The investor has mistaken the map for territory. He has seen the 6 schemes closed as the terrain rather it’s just the map. This reasoning fallacy could lead you into a abyss when taking high stakes decision.
Example : In Enron people looked at the company’s balance sheet ( Roe, Roce’s, growth , profits ) etc and assumed the company is a sound investment. What you’re missing is, failing to see the broader full picture like the people running it , the supply side , demand side which led investors into a rabbit hole.
2. Pavlovian conditioning – Investors now will be conditioned to debt schemes as risky. Soon as analysts like us pitch an investment in a debt scheme the immediate response would be “ No. its likely to default, or close down” . This is a very powerful model to think of from the Perception of investors and fund managers in debt and other MF schemes.
Let’s not dwell deep into Pavlovian conditioning , but just how this works.
Example : You are driving you car on a regular route to office at 100 Kmph inside the city limits with (40 Kmph) Cops stop you and imposed a fine for speeding and this is the 1st time it happens.
Over the next few weeks you drive fast as usual and are stopped by the cops and imposed a fine. After a month automatically you slow down your speed when you are on the route where you’ve been fined. What happened ? Your brain has associated speed and fine and is now conditioned.
3. Hindsight bias – The tendency to think that you knew something would happen after it happened or “I knew it all along effect”
If investors or advisors knew for sure and such a signal was given to them than why not exit ? Few people fall prey to this assuming that People who say “I knew it all along” are good at predictions. But the “world is wicked” as David Epstein says in his book Range ( Recommend this book if you haven’t read), in real you can’t predict anything its all just probabilities and chance.
4. Problem of induction or Turkey problem – As Nassim taleb points out in his book Black Swan , when the turkey is fed for 1000 days which makes it feels safe, like the Gaussian Risk analyst who doesn’t account for risks outside his model. What about the 1001th day when the turkey goes to the butcher shop.
It’s a Black swan for investors (the turkey) not the FT ( Butcher) , the 9/11 was a Black swan for people exposed in the building but not for the preparators who knew it beforehand.
In FT’s case it’s the investors who are the turkey, a few funds had very high AUM where they were fed for 1000 days (On average it feels safe) but what about the 1001th day ? It gets fed or exposed to a (Negative Black swan). The persons managing the funds were aware of this event (the butcher).
5. Anchoring bias – It’s the most important part of of reasoning that leads astray. People are more anchored towards a reference point and make decision from that.
What can be the anchoring effect here ?
2. Returns higher than FD.
3. Reputation or authority bias.
Why do people fix a reference point and make a decision from there ? Because in a complex world it’s very difficult to approach a situation with an open mind and tolerate ambiguity, this fosters reference point and anchoring which serves as a antidote to complexity. People feel more comfortable and safe when they have a anchor to make a decision with.
Example : People ask what are attributes to a good investment and come up with many variables like ROE, P/E , ROCE , FCF,growth etc, but most of the investment decisions require a more broader analysis , but people always think set of anchoring point is a safe place to start screening ( I have never heard of Warren Buffett screen an investment with such precise anchors). When you are anchored to a variable ( Recall the map is not territory problem) you fall prey to it.
From a vantage point what can we reason.
Don’t base your reasoning on the map or a single event always try to see the full picture. Think how the broader scenarios will play out in the future.
What can investors do if they smell trouble, at the first signs of trouble it’s good exit and to protect capital, FT’s previous schemes had a default that should have been a warning signal ( Vodafone idea )
Nobody is good at predicting, people who say “I knew it all along” have a hindsight bias which will distort your thoughts if you believe them.
If an event has not happened before it doesn’t mean it will never happen, Black swans are usually unpredictable. So always be on the edge. After marking investments don’t take the back seat and relax always think in terms of scenarios which can play out.
Don’t begin your investment decisions on anchoring on a few variables. Always have a multiple reference point
1. Soundness of investment decision
2. Likelihood of default
3. Chance of permanent loss of capital
4. Am I making this decision based on authority bias ?
5. Assuming risk of an investment based on Normal distribution or Gaussian, most black swan always happens outside these models ( > 3 standard deviation) Don’t be fooled by the prospectus which says our fund has a 1 Standard deviation (remember Corona virus and FT closure was not captured in that 1 Std deviation ).