What the Facebook IPO tells about investors' brains?

May 22, 2012

In this issue:
» Why Chinese leaders are a worried lot?
» Is it a good time to buy gold?
» MBAs are having a great time in India
» Time Indian Govt became more co-operative
» ...and more!

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Heuristics. A man on the street may find it difficult to fathom the meaning of this term. But it forms an important part of any psychology course. Simply put, heuristics are nothing but rules of thumb developed by the brain in order to make every day decisions. The key purpose, of course, is to eliminate the time required to process all the information that we are bombarded with day in and day out. In other words, heuristics can also be called as short cuts to decision making. Thus, heuristics, as we can all see, is a boon to mankind.

But here comes the biggest paradox. Mankind's biggest boon can also easily be its worst enemy ever. It has been proved that a blanket acceptance of mental short cuts or heuristics can lead to disastrous results at times. What makes matters worse is the fact that most of the times we are not even aware that we are in the grip of heuristics i.e. we are relying on short cuts to make decisions. The key therefore is to be able to know when to and when not to rely upon these mental shortcuts.

Nowhere is the misuse of heuristics as blatant perhaps as in finance. Warren Buffett put it quite elegantly when he said that investing is simple but not easy. In effect, the Oracle of Omaha was trying to warn us of the tendency to use mental short cuts that we have picked from other walks of life into finance. You see, finance has its own heuristics or own mental short cuts if you will. But they are so much at odds with the heuristics of our other walks of life that more often than not we end up using the latter when using the former would have served us much better. Consequently, a poor financial result is all that we end up with.

The recent IPO of Facebook is a perfect example of how wrong use of mental shortcuts led investors to burning their fingers. The IPO was one of the most hyped IPOs in history and quite rightly so. The company is such an integral part of our e-world and is such a pioneer that investors thought that the company's shares are a buy at any price. But finance doesn't work that way. Usually, what is most popular is always fully priced and this is what happened with Facebook. It was valued so high that the probability of a listing gain or even a long term gain seemed pretty muted indeed. Little wonder, it opened to a pretty lukewarm response. Thus, a better idea in finance is not to buy what is popular but to go for the unpopular and the least followed stocks. This heuristic has a much better chance of success in investing than the one taken from our day to day lives.

Do you pay attention to heuristics when making investing decisions? Share your views or you can also comment on our Facebook page / Google+ page.

 Chart of the day
Bringing back Swiss money stashed abroad has become almost a national obsession in India. One of the key reasons for doing so was believed to be the humungous sum involved. However, if today's chart of the day is any indication, it appears that the sum is not that big after all. What more, even as the Indian economy has grown over the years, Indian deposits in Swiss banks as published by the Government have been falling year after year since 2006. Is it the case of the culprits being one step ahead of the Government? Looks like they have already moved much of the money elsewhere.

Source: Economic Times

Over the last three decades, China's phenomenal economic growth has been the envy of every nation. Today, it stands amongst the most important economic powerhouses in the world. Yet its political system still remains a worrisome aspect. In fact, Chinese leaders themselves are not very certain about China's future. Now, they are not just seeking control of wealth, but ownership as well. Apart from all other reasons and greed, ownership creates a strong political hedge. Chinese leaders are increasingly globalising their asset base. One official estimate suggests that since the mid-1990s, at least US$ 120 bn has been illegally transferred abroad.

Corruption within the Chinese political system is as stark as in the Indian politics. But despite all its ills and flaws, India still enjoys a democratic system. One of the biggest challenges facing China is the long standing desire of its people for freedom and democracy. For how long will Chinese leaders be able to suppress them? The day of reckoning may be not too far.

Looking for an over 50% hike in salaries? Do an MBA. This has been the thinking of management graduates particularly in India. And they have no reason to change this. In fact if anything, their expectations from the course have just gone up in recent years. As per a survey conducted by Graduate Management Admission Council (GMAC), MBA students expect up to 200% increase in their salary levels post graduation. This has shot up from their last year's expectations which stood at around 80% increase. And the best part for them is that employers are willing to loosen their purse strings for them.

In the survey, nearly 89% of the employers in India have stated that they would prefer to hire MBA graduates. In fact, the demand for MBA new hires in the whole of Asia Pacific region is quite high. Companies are looking to expand their footprint both within their own countries as well as outside. And they see MBA graduates as an important key to achieving this goal. Contrast this with the slowdown in hiring as well as salary expectations in US as well as Europe. The expectations of both the students as well as the companies mirror the state of economies in which they are living in. And rightly so!

Global uncertainty, especially about the status of Greece caused a major selloff in commodities. The recent fall in gold prices has now raised concerns about its safe haven status. Demand from India, a major consumer of the yellow metal has also been weak, underpinned by a threat of further policy restrictions on bullion import.

However, according to Ben Davies, CEO of Hinde Capital, it makes sense for investors to lap up gold given the current weakness. A few factors are pushing gold to further upsides. The market is oversold currently. Plus the Fed may be about to go in for further monetary easing. These two factors could provide the much needed upside for the commodity.

Government policies elsewhere are critical contributors to corporate success. In India, companies succeed 'despite the government'. The outcome of policies framed by Indian government has always been very unpredictable. So much so that even today we need to refer to a two decade old 'liberalisation policy' in order to cite a favourable one. Since 1991 successive governments have failed to deliver any noteworthy policy reforms. On the contrary, the periods of policy inaction have offered some respite to Indian companies. These have been phases of better profits and higher growth. But most of those were during little government intervention.

Sectors tied to government policies have had a tough time otherwise. Take the cases of banking, telecom, oil and gas, mining, sugar or fertilizer sectors. There are some very profitable companies in these sectors. But most are now gasping for breath. This is thanks to the government's keen interest in them. True that corruption in some of these sectors has necessitated more supervision. But unfavourable and redundant policies don't help! In fact, they can only make matters worse. Most companies are currently struggling to keep their bottomline in the positive. The least the government can do is get more cooperative.

Meanwhile, indices in the equity market in India opened on a positive note but have plunged into the negative territory at the time of writing. Sensex was trading lower by around 45 points at the time of writing. Heavyweights like ITC and Larsen & Toubro were seen driving a significant part of the decline. Most Asian indices closed higher today with Europe too opening in the positive.

 Today's investing mantra
"Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we're trying to do. It's imperfect, but that's what it's all about." - Warren Buffett

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    5 Responses to "What the Facebook IPO tells about investors' brains?"


    May 23, 2012

    Heuristics, as you say, the shortcut decision making is taught by the news articles published in the business magazines & TV channels, e.g., talking about long term investment and SIP etc without saying meticulously about profit booking, stop-loss, macro-economic situation etc. Luckily I booked profit in 60% of shares in 2010 but the shares which I did not sold at that time will sleep for another 3/4 years to earn profit.


    sunilkumar tejwani

    May 22, 2012

    government data on Swiss bank accounts is totally fake, for the obvious reasons. If a law is passed to prosecute Swiss banks for alleged black money then the entire Swiss banking system will collapse in a few minutes. But alas! no politician is ever interested in doing so, because of being every politician involved in the racket.
    You may admire Warren Buffet for his investment genius but these are stories of the yore. He has made his billions in the past, but going forward, it will be difficult to make more money from the investments made forty years ago. Otherwise, why a billionaire like Warren Buffet chose to open an Insurance Agency of Bajaj Allianz? It speaks volumes about his intellectual and moral bankruptcy.



    May 22, 2012

    In the field of investing, strategy differs from person to person. Nobody can achieve 100% success in their strategy. They have to adopt different strategies depending upon the market conditions. But behind the heuristic way of approach, a lot of home work is there.!!!



    May 22, 2012

    I am surprised that you are surprised that blackmoney in the swiss banks has been reducing over the years. The ruling class & aspiring ruling class , because of their access to decision making knew that their time is up & with so much of hype Govt will be forced to bring the black money(including Bofors money) back today or tomorrow & they have been systematically withdrawing their money, part of which finds their way to real estate,the reason for real estate proces not falling inspite all you economical pandits predicting that. Why do you think that Pranbda was able to make a statement in parliament that the list does not contain any MPs? The slow response to offers of other countries to disclose the names in one pretext or other was to allow ruling class time to emty their swiss a/cts.
    By the time a farce of any action on this comes all a/cts would have been emptied

    Like (1)


    May 22, 2012

    I always use heuristics approach in stock market. I am now almost 35 years in the field of stock investing. Whatever success I achieved is the way I selected i.e. "heuristic way of approach". As regards Facebook, I always say, you can fool some people some time, but not all the people everytime.

    Like (1)
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