The Hungry Lion Questionnaire
Let me ask you a question “What will you do if the stock market falls?”
Think about it.
What will be your response?
Now I give you 3 options:
a. Invest More
b. Stay Put
c. Run Away
Most people are likely to answer a or b. When you see the option “Run Away”, most are likely to dismiss it as no one wants to appear to be running away. Even if I replaced the words “Run Away” with “Will be Scared and Sell Everything”, chances are most people will still select a or b.
Now how do people behave when the stock market falls?
Wise people indeed stick with option b and if they have liquidity, go for option a, but most people go for option c. They sell and run for safety.
This tells me how useless these risk assessment questionnaires are in evaluating the real risk profile of people. Useless may be a strong word but the right word is ineffective.
Let me now ask you a different question “What would you do if you see a Hungry Lion 10 feet away from you?” You are likely to say, “I will run as fast as I can”.
Now Imagine you are in a South African jungle. A Hungry Lion shows up right next to you. What do you think you would do?
Frankly speaking, I would panic, and I would probably freeze right there despite knowing what I should be doing.
This is because there is a big difference between understanding something intellectually and understanding something emotionally.
Intellectually I understand I need to run. Emotionally I might Freeze.
Likewise, Intellectually, most investors know they have to buy LOW. Even a 5th grader knows that.
However, Emotionally, they just RUN.
Most Financial Professionals are likely to throw loads of data/charts to prevent them from running. While some might get it, Majority of the people will still Run Away to Safety. There is no rational or logical explanation that anyone can give them unless they understand the concept at an Emotional Level.
The sad part is that not just wealth creation opportunities are missed but even wealth accumulated so far tends to get lost in such exits.
Thus, Risk assessment questionnaires have limited utility. They seem to be an exercise done from a compliance perspective to cover our backsides.
There can never be a perfect risk assessment exercise, but you can come as close to the conclusion with these 2 questions as is realistically possible. This can be used by your professional to supplement their existing questions or even by you to assess your risk profile. Do not get tempted by looking at someone else’s returns or the product pitches that are made.
Ask these questions:
a. How did you behave during the February –March 2020 Correction? You can even look back in 2008 or even the dot com bubble but the best is to look at last year.
How did you behave? You are exactly likely to behave like this even today.
Do this exercise honestly and respond. If there is a pattern of panic that is evident, the diagnosis is clear. You do not have what it takes to be an equity investor and thus you should not be investing in it. Even though Investing in Equity is the right thing for you, if you are likely to panic, then you are better off not investing in equity.
b. Do you allow your professional to let you guide you in such times or do you override and do what your emotions are telling you to do?
Clients who seek guidance and counselling collaborate with their professionals and do well. Think about how you have behaved in the past with other professionals.
Several years back, a dear client who had called to invest in equity was clearly told that he does not have the emotional understanding to ride the tough times. Thus, this is not suitable for you as your sleep and health are paramount to us. Even our sleep and health are important to us. If you end up losing your sleep, we will lose ours too. Thus, if you so badly want to invest, you can go to someone else, but we will not let you invest. The client told us that he understood our concern and gave us a written undertaking of not panicking in such times and sleeping well at night.
We started him with a small amount while having a rock-solid plan of what to do when a correction happens and what not to do. He also told us to not listen to him if he tells us something to do. With some solid coaching over a period of time, this gentleman was excited to invest when the markets corrected in 2020.
It is not surprising that even after getting the biggest lesson of our investing lifetimes, some people have just not learned anything. One came up with this theory that with the rise in COVID-19 cases, there will be a correction.
Frustratingly I say, “So What?” Corrections will happen whether for 2nd wave of COVID-19 or for something else. Then What.
Will the stock markets not go up?
Are you investing for 2 months or 2 decades?
All the key lessons of investing were taught last year and if you still have not learnt any, you shouldn’t be invested in equity or any asset class that is volatile.