What's your verdict on Salman Khan?
(May 8, 2015)
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In this issue:
» Indian markets trading slightly lower to their average 10 year forward price to earnings multiple
» A round up on markets
» ...and more!
6 May 2015. This was going to be the day of the verdict.
It seemed like it was the most important national event since the general elections last year.
The whole country watched and waited as the media produced minute by minute coverage of the hearing of the 2002 hit-and-run trial.
Then came the judgement... The trial that dragged for over 12 years and endured many twists and turns, finally, came to a definite turn. (Of course, this is not the end yet. The verdict will be challenged in higher courts and it is anybody's guess what will happen in the end.)
Salman Khan's trial could surely make for an engaging coffee-table conversation. But that's not what I want to discuss here. What really stunned me was the flood of extreme reactions that followed the verdict... And that's what I want to delve deeper into...
Understanding human behavior and its effects on investing has been one of my key areas of interest. I believe that investing is not a rocket science, but a game of the mind. If you can master your emotions, eliminate thinking errors from decision making and follow a disciplined, process-oriented approach to investing, there is nothing that can stop you from big successes and riches.
I also believe that people invest the way they live. Your investing behavior is a replica of how you respond to daily life situations. So if you want to transform your fortunes and taste success in investing, first be prepared to transform your mindset.
Coming back to Salman Khan...
What did people say in his defence?
Some cronies and die-hard supporters of Khan held on to the view that it was not Salman's fault. They blamed the people sleeping on the pavement for their predicament.
Some blamed the government for not housing people, which resulted in such an accident.
'He is a changed man'.One key argument that all Salman sympathizers put forth was to look at his good side. Look what he has done for society through his generous charitable work. Look how many lives he has saved. Why put such a kind-hearted man behind bars for something that happened more than 12 years ago?
Some people couldn't eat after the verdict... As per a news portal, a man allegedly attempted suicide outside Bombay High Court...
The list is unbelievably endless...
I was amazed to see how people react at times of extreme emotion... How they can distort facts to conform to their thinking...
I'm sure most of you read news, watch television and follow the social media. Just think about these questions for a moment... How do you choose what information to consume? What questions do you ask? How do you formulate your opinions? How do your preferences and biases affect your opinions? How do you weigh different facts in your head? How do you deal with confusion and absence of complete information? How do you arrive at conclusions and decisions?
If I have to put it in just one line, then the question would be: How consciously do you think about your own thinking?
I strongly feel that the Salman Khan controversy has many big lessons on human psychology that can have meaningful application in investing. Here are some that came to my mind:
Who really is this guy called Salman Khan?
Salman Khan. The name rarely comes without the prefix "Bollywood superstar". And why not! That's exactly how we know him. We primarily know him because of his movies. We have seen him as the romantic lover, the super cop, the ideal son... But above all, we know him as the well-meaning, good-hearted, archetype Bollywood protagonist who goes around bashing the goons and saving lives.
Some bits and pieces that we know of him are through news reports, gossip columns, interviews, featured articles. I guess almost all big stars have well-functioning PR machineries whose key role is to project, promote and protect the star's public image. So what you sometimes read as news are, in fact, advertorials meant to propagandize a certain view of the star - how generous and kind-hearted he is because of his charity and so on. (If you have cases and controversies lined up against your name, this is one of the most effective face-saving exercises you could do.)
Assuming that none of us really know Salman Khan in person, our image of 'who Salman Khan really is' is based on all public information available to us. If you think for a moment, there is a huge information vacuum.
But the human brain is an interesting device. When faced with incomplete information, it accommodates any bits and pieces of information to create its own perception of the object.
So we know the Salman Khan on reel. We don't know him in reality. The brain focuses most where information is available. In absence of real information, it may sometimes take the 'reel' information as real. In a star-crazed, hero-worshipping country like India, this phenomenon needs no explanation.
# Investing lesson
Do you buy a stock because of its business fundamentals or public image? Do you end up buying stocks that are repeatedly discussed in business dailies, business news channels or investor forums? The stocks that appear most in the media are not necessarily blue-chips.
The forgotten 'tiny' yet important details
How many times over the last 12 years have you heard or read about the pavement dweller who got crushed under the Land Cruiser? Or the others who got seriously injured but survived? The key witness who died under mysterious circumstances? The image of Salman Khan has occupied so much public mind space that these 'tiny' yet crucial details have become obscure components in people's minds. By the same logic that I explained above, the brain can be tricked into evading crucial information by reducing exposure to that information.
# Investing lesson
Always peruse through a company's annual report for tiny yet critical details. If you see any red flags in a company's financial health or corporate governance, do not ignore them. Be doubly cautious in a bull market when investors are willing to discount such issues.
Public memory and recency bias
The car accident happened in September 2002. It's been over 12 years. That's a very long time for people to really feel the pain and the predicament of the pavement dwellers. As an event gets older, its impact on people's minds begins to subside. The human brain has a tendency to focus most on what is recent. This is called the 'recency bias'.
Do you recall the 2008 financial crisis and the stock market meltdown that followed? Many people burnt their fingers badly and lost their hard-earned savings. Many lessons were learnt. Buy fundamentally good companies... Don't overpay... Invest for the long term...
But with time, these lessons tend to be forgotten... only until the next market crash... And then again people lose money. History repeats itself.
Lady Justice wears a blindfold
I'm sure you all must have seen the image of Lady Justice in courtrooms. The blindfold signifies that law should be viewed objectively, without bias and prejudice. To achieve this objective, the judiciary is governed by a set of rules and laws. These laws help the judiciary to seek the truth in a logical, fair manner and to uphold the interests of all the parties involved. Imagine what would happen if judges started pronouncing verdicts based on personal feelings and likings? What would happen if singer Abhijeet Bhattacharya was the judge?
In investing, you may notice that your thinking may tend to change with the changing market sentiments. There is no way to fully eliminate all biases and thinking errors. But there is a way to minimize them. The answer is having an investment checklist. A checklist may help you evaluate a company on key investment parameters. Prepare a set of parameters based on your investing approach. If a company fails to meet the requisite criteria, you may want to avoid investing in it.
What do you think about the public reaction to Salman Khan's courtroom verdict? Let us know your comments or share your views in the Equitymaster Club.
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Ever since the Modi Government came to power, the market has been riding a bull rally, barring the correction witnessed recently. Almost two weeks ago, 9 of the top 10 most valued companies saw their market worth eroded by over Rs 650 bn. Now that's a correction that we have been warning our readers about for quite some time now.
Currently, Indian markets do look attractive when compared to global peers. As an article in Livemint suggests, Indian markets are trading slightly lower to their average 10 year forward price to earnings multiple. Barring Taiwan, all key global markets are trading at a significant premium. This is indeed reassuring to some extent, considering that economic prospects of India seem far better than the ones that are trading at a premium. That said, investors would do well to keep track of such movements only to scoop up good businesses at attractive valuations and not get carried away by trends.
Global stock markets: Comparing valuations
Prices as on 30th April 2015
The Indian stock markets ended the day in the green. While the BSE-Sensex was up by 506 points, NSE-Nifty was up by 134 points. The major Asian equity markets were trading strong as well. European stock markets also opened on a positive note.
"I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading 'Now is the time to buy.'" - Peter Lynch
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