Stay Aware Of Your Recency Bias

LARISSA FERNAND writes on the mindset of investors and their relationship with money

- LARISSA FERNAND

If there is something you should know about investment behaviour it is this one single fact that it is the same across every market in the world. Similar patterns are witnessed across races and nationalities, and it has been played out across centuries.

That is so because human nature is a constant. Beneath all the superficial characteristics of humans, we are the same, a trait also observed by Voltaire: "When it comes to money, everyone is of the same religion" When it comes to the stock market, you should know this. Fear sells and excitement buys. And every single mania in history has revolved around this. Be it the Tulip Mania (1637), the Mississippi Bubble (1720) or the South Sea Bubble (1720). More recently, we had the Dotcom Boom and the Bitcoin Bubble. Abundance of intelligence, or the lack of it, is completely irrelevant here. I remember reading with great amusement a research note that stated, "Issac Newton did not just taste of the (South Sea) Bubble's madness but drank deeply of it!"

Today, people want to drink the public sector undertaking (PSU) mania. Some of the headlines that I encounter are:

Railway stocks rally before the Budget announcement.

Railway stocks took a beating.

PSU stocks' rally continues.

Pre-Budget sentiment stocks to buy.

Multi-bagger PSU stocks.

Please note, I am writing this before the announcement of the Union Budget 2024. By the time you read this, the situation may be completely different, which will only prove my point.

This article is not about the Budget. Neither is it about whether or not you should invest in PSU stocks or railway stocks. It is abou how we get carried away by events.

The event could be a trade war, geo-political conflict, or tapering (the incremental reversal of a central bank's quantitative easing strategy). This time, it is the Union Budget.