Interesting Stories of Investing Biases

Just Circle Of Competence is Not Enough

In this blog post, I will be sharing my second interesting story on investing biases. The point is – I am trying to be more on the practical side than on the theoretical side of behavioural biases.

Here I am trying to understand my mistakes / learnings through these Investing Biases.

These are my mistakes and my personal views.

So here goes the second story.

As we retail investors rarely come up with our original stock ideas, we keep on searching for them on Social Media. During such a search, I came across a stock.

I watched an API webinar on YouTube. The person presenting it had given the full disclosure beforehand. In his talk, I heard about a small cap pharma company. He explained how the company has improved its ROCE in recent quarters , how one large US Pharma company has given business to them, and it’s even exporting to China etc. So here I fell prey to AUTHORITY BIAS. Mind you the speaker has not at all talked about his entry price / his allocation.

So now I start following the stock. And to my surprise, it slowly rose from 200, 225,250,275 to 300 levels in just a few months. So now the Fear Of Missing Out (FOMO) sets in. How can I let this future MULTIBAGGER ( being a small-cap ) go out of my hand? So I end up buying it above 300.

And as happens with many of us, as soon as we buy the stock, it starts falling down. I try to find the reasons but find none on SM.
Now as I own it, it becomes my PRECIOUSSS…. So the ENDOWMENT BIAS kicks in.

And this time I had my reasons to hold on to it. Being a medical professional, it’s within my Circle Of Competence (COC). The company manufactures APIs for different types of antibiotics and many chronic therapy molecules. Company is exporting across various geographies. So lots of “Optionalities”. On the corporate front, the company has announced a dividend after 20 years, So it’s a TURN-AROUND candidate. This CONFIRMATION BIAS blinds me from studying the company any further.

But now stock starts correcting from 300 to slowly 250. Now the LOSS AVERSION kicks in. As the pain of loss is 3 times more than that of profit, I don’t sell it. And with CONFIRMATION BIAS so strong, I end up averaging it down all the way till 180. This is classical SUNK COST FALLACY – Throwing Good Money after Bad Money.

Now the company declares its Q2FY23 results. Mind you the results are not that bad, but the market hammers down the stock to 140 levels. Now I don’t have the DARING to either average it down or even to hold it. And at last I sell it at a huge loss. And BLAME the market for my loss.

So the Learnings – Just because the business is in your COC, one simply can’t buy it blindly. You still need to study it thoroughly & apply some check-lists before buying it. Particularly in this company, there were irregular Investor Presentations & no conference calls.

Another important point is – Avoid Averaging Down and Apply some Stop-Loss- (maybe price related / time related) especially in these borrowed conviction ideas. This can definitely help in avoiding biases like Loss Aversion & Sunk Cost Fallacy.
Hope you liked the second story also. Please share your opinions.
Also do share your such interesting stories.
Thanks,
dr.vikas