- Wealth PMS (50L+)
This post is about decision-making and a plug for why we think you should subscribe to Capitalmind Premium this Diwali. Read it with a generous pinch of salt.
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Who do you trust to get reliable, unbiased information to make your investment decisions?
From your friendly LIC Agent uncle who paid a visit soon after you got your first job to your Bank RM, unsolicited SMS’s of can’t miss trading ideas, Futures & Options Seminars by folks whose screenshots suggest they are doubling their net worth every third day, and even research platforms like ours, there is no shortage of sources of investment recommendations.
How does a reasonably intelligent person interested in doing the right thing for her financial future decide who’s worth listening to?
After all, the potential costs are not just in the form of a fee, since many sources have nominal or even zero cost, but the substantial opportunity cost of implementing wrong advice and the heartburn that comes with it.
To answer the question about who do you trust, take a moment to consider what makes some advice more valuable than others.
Think of the last time you took advice from someone and implemented it more-or-less without question. This could be a recommendation on whether to watch Dark on Netflix versus Mirzapur Season 2 on Prime Video, or about which refrigerator to buy, or on a more serious note, which specialist to consult when dealing with a family member’s health problem.
What made you go with the advice / suggestion / recommendation?
We might not be able to pinpoint what makes us take some advice and reject others, but here’s a simplified way to understand the process we subconsciously apply:
Think of it as the likelihood of correctness
What about the source suggests they have the tools and the focus to have thought about a problem, deeply enough.
This comes down to demonstrable expertise, and to a lesser extent, credentials.
The graphic below is meant to highlight where some opinions would fall on a sliding credibility scale.
Credibility is context-dependent. A doctor who quickly identifies your runny nose as a common flu based on the dozen similar cases he’s seen in the last week is highly credible. That same doctor, when diagnosing a rare set of symptoms he’s never seen before, has lower credibility.
Post-COVID GDP growth forecasts are close to meaningless because the pandemic took what was already a guesstimate exercise and added about 10x uncertainty into it.
But credibility alone is not sufficient. We know this subconsciously.
The level of certainty that the advice-giver has your best interests at heart.
Are you aware of the source’s incentives, and are they aligned with what is good for you?
Here are some examples.
Trustability is mostly context independent. i.e. Someone who scores low in one context is unlikely to score high in another.
Notice how high trustability doesn’t necessarily mean the right advice. Just that the source is offering what they believe is the advice best for you.
Your mother might want you to eat more because she believes that’s best for you, but most of us sedentary folks, need to be eating less of the wrong thing, not more.
You’ve probably noticed the two scales are orthogonal, i.e. just another way of saying they are independent of each other.
Important decisions need to consider both at the same time. But that’s not how we usually operate. Sometimes, a high score on one axis overrides an unknown or even low score on the other.
High-Trustability / Unknown or Low-Credibility: You decide on which refrigerator to buy based on a friend’s advice who bought the same one two years ago and has not had problems. You don’t weight his expertise or your specific requirements and the possibility of other better models available since then.
High-Credibility / Unknown or Low Trustability: You stock your cart with items in the health food aisle and count on packaging with big bold lettering that says “low fat”, “high-fibre” to mean they’re good for you. Only a closer examination of ingredients shows they are anything but.
A Credibility-Trustability matrix starts to give a better idea of where typical opinions / advice falls and therefore where they might go wrong.
The numbers on the boxes are for easy reference. The 1’s (low trust-low credibility) are easy to spot and avoid. Box 4 is where you would want all your key decisions to come from.
But we confuse advice from boxes 2 and 3 for 4.
Notice the solid blue line and the dashed red line. It implies that advice from the same source can move from left to right, but not from bottom to top. For example, a friend who gets deeply interested and researches hatchbacks moves from box 3 to 4 on that topic. That same friend might be disastrous to turn to for relationship advice, but still a box 3.
LIC Uncle’s advice on anything investment-related will almost always be to maximise his commissions and not what’s right for you. It’s certainly possible that his own understanding of financial instruments might mean he’s in box 1 and not 2, but unlikely that he moves from 2 to 4 at any stage.
Knowing who fits where, at least as a starting point, and relying on sources that are at minimum not in 1 and 2, can go a long way to improving the quality of your decisions.
Where do we fall on the Credibility / Trustability matrix?
Clearly that is for you to decide. Investment management is far from an engineering problem with exact answers. We have made and will continue to make our share of mistakes when it comes to identifying investment ideas. Our portfolios have and will sometimes underperform the market.
Good investing is so much more than about a set of stocks.
In fact we don’t think having access to even the best active stock portfolio in the world will make you rich.
Don’t get me wrong. The Capitalmind team loves to dive deep to unearth potential winners, be it companies or investment strategies
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We track and monitor them and look for ways to improve on their performance
But we also think building wealth over the long term is hard if you don’t understand the role of asset allocation in being able to stick to a plan.
Or the role that fixed income can play in a portfolio, and how to get it right
For that for all the marketing of brilliant stock-picking, it is incredibly hard for a set of actively picked buy-and-hold stocks to beat the market.
How there’s place for short-term strategies in long-term investor playbooks
And last, but certainly not least, because we never have all the answers, the learning from the incredible Premium Member community
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Wishing you and your family a happy, healthy, prosperous and joyful Diwali.