‘If the result you are observing is a Lollapalooza, look for the confluence of multiple causes and multiple factors operating in the same direction’ – Charlie Munger
We will shortly enter into a new world – the post COVID world. Hoping this ‘shortly’ comes sooner than soon!
The world economic order has been shaken and the strongest of the developed world economies are struggling to get the economic growth on track.
China is bearing the brunt for the COVID created chaos and has lost out on trust of the investors.
The recent border dispute with India too has dented its image in the world.
In the current pandemic scenario, we have shown tremendous resilience and the entire world has looked up to India to steer ahead.
We are at the cusp of rebooting the world economic growth.
So, what’s working for India?
Should we trust the lollapalooza effect to catalyse our economic growth engine in the next few years?
Lollapalooza effect was coined by the renowned investor Charles Munger aka Charlie. He often attaches the word “effects” (as in “lollapalooza effects”) which means that multiple factors are acting together in ways that are feeding back on each other.
In simple words, lollapalooza effect is an outcome which is far bigger than the sum of the parts, as in 2+2 is not equal to 4 (linear) but 22 (exponential).
Using this mental construct of lollapalooza, one can explain the cause-effect relationship behind extreme events in the world.
Not only explain, but Lollapalooza helps us understand the workings of this complex world so that we can leverage that for our benefit.
Several factors are working simultaneously in favour of India (Lollapalooza Effect):
- The strong image in the world
- Stable government and leadership perception
- Robust macro-economic fundamentals
- Steady and sustained capital inflows
- Favourable impact on current account surplus due to the drop in oil prices
- Reduced terms of trade with China
- Looking inwards at our core strength of huge demographic dividend to be reaped from the young workforce
- The rapid pace of digitization
- Supportive sectoral policies
- Good monsoons for the agriculture-dependent industries
- Declining interest rates to boost liquidity in the banking sector and push investment
- Channelling of surplus liquidity by RBI through the banking system
- Kick start growth
- Higher investments in economic and social infrastructure, and many more.
These green shoots are clearly visible for the Indian economy to chart a sustainable growth path ahead and lead the world out of the current pandemic created economic slowdown.
However, not all may be hunky-dory by getting swirled in the whirlpool of lollapalooza.
We have many cognitive biases that can sway our behaviour one way or another. All these psychological tendencies work at a subconscious level.
We tend to make decisions based on readily available information.
Munger believes the ‘lollapalooza effect’ can result in herd mentality, the more individuals follow a certain idea/behaviour, the better we consider the idea to be!
With the advent of social media, everyone has the power to shout their opinions openly.
Also Watch: The Lollapalooza Effect in Fitness and Politics
The incessant noise from the TV channels, financial newspapers etc aggravates the recency bias and social validation in an investor’s mind.
But isolated facts get you nowhere. They need to come together on a framework of theory, to become usable. In the words of Emile Auguste Chartier:‘Nothing is more dangerous than an idea when it’s the only one you have’.
Understanding the lollapalooza effect would assist in safeguarding ourselves from committing common mistakes and help find important investment opportunities.
So, focus on buying quality and growth, avoid repeating expensive errors and be more confident while investing.
Dear Investors, let’s enjoy the Indian lollapalooza music festival, dance on the beats and beware of the noise!
This post has been written by Dr. Tarunika Jain Agarwal (PhD) for Alpha Capital Research Team.
Read the analysis on Indian Companies here.
Cover Image: High End Systems