Decision and Outcome

Amar Pandit , CFA , CFP

On Sunday, I met a gentleman called Aakash at a social gathering and he showed me a message his nephew (22 years old) had sent him. It read “Uncle, invest in X. It will go up 5 times in 4 years.” The wealthy uncle was anyway intrigued by the outcome his nephew had indicated and was looking to invest eagerly.

I asked Aakash “What did you tell your nephew?” He said, “I told him we will put in some amount and see what happens. If it works, I will invest more.

What do you think of this Amar?”, he asked me.

I told him “Let’s assume for a minute that the investment goes up by 5 times. Would this be a great decision for you then?

He said “Yes, it would be amazing. I will surely invest a lot more money if this were to happen.

“Why would that be a great decision?”, I instantly asked him.

Aakash responded “Well my money went up 5 times, so it was a great decision.

I then asked him “Let’s say during Diwali, you take a significant amount of your portfolio and bet it for a 10X return while you play a game of cards. You Win and your money has gone up 10 times. Was this a great decision or a bad decision?

I could see some confusion on his face yet at the same time I knew he was thinking.

I added further “Let’s say you continue the game that night and you bet all that you have in the next ten rounds. You win all of them. Was this a Great Decision or a Bad One?

All of these were Bad Decisions. Just because the Outcome was in your favour or was the one you like does not make the decision a great or even a good decision.”

This is exactly where most investors go wrong. They look at outcomes and arrive at the conclusion whether the decision was great, good or bad.

Let’s say you cross the red light while driving and nothing happens. This does not make the decision of crossing the red light a good one. It is still a dangerous one and can put your life at risk.

I see this all the time in the world of investing.

People look at outcomes and then decide whether something is worth investing or not. Most salespeople know this innate desire of people.

I told Aakash “It’s not important whether X goes up or not, you must at least understand the basics of this X. The first step is to invest your time to learn about this before you invest your money.

Some of you might be wondering what this X is. His nephew was talking about a specific Cryptocurrency.

I told him “Here is what is likely to happen:

  1. You invest with the outcome in mind.
  2. The investment then drops down by 50%. In case of Cryptos, falls of 40-50% happen in a matter of days.
  3. The media starts writing how everyone has lost money and that this is going to Zero. The same media was writing earlier how everyone else is making money in this.
  4. You start panicking and then sell at a Loss.
  5. You swear never to listen to your nephew. Your relationship with him goes for a toss.
  6. You then go to parties and say “This is all too risky. This is all a big fraud. I will only invest in my business.

This circle will repeat again at some point of time again. Only this time it’s not your nephew. It’s your friendly neighbourhood expert or someone else.

The issue here was not about listening to your nephew or believing him. The issue is whether you have a process to make great decisions.

  • Do you really have a process to evaluate decisions?
  • Do you have the care of a real financial professional who is able to set an investment process to help you from such costly mistakes?
  • Do you have conviction in what you are doing?

An understanding of what you are doing (based on a process) and a belief in the philosophy of an investment will give you the conviction to stay put during turbulent times.

For example, those who had a process, understood the philosophy of investing and/or had the care of a real financial professional during COVID-19, stuck with their investments and invested wisely in the last 18 months.

Without this understanding, there is no conviction to invest. The only thing you are looking at is an increase in price. This is not investing. This is plain and pure speculation.

If you must speculate, please go ahead. It’s your money but for heaven’s (or rather your own) sake, don’t confuse it with investing.

On that note, I wish you and your family a very Healthy and Happy Diwali. Happy Dhanteras and Have a wonderful week ahead.