It is an apt advice for any investor who is weighing options on what to do next in this stressed markets. But the challenge is not as much about knowing what to do, but how to do. The reason being, sitting tight is easier said than done. Many investors intuitively know that if they stay the course, they will get rewarded. After all, everything is cyclical. But they still fail to follow their own advice. Why?
History is full of people who are otherwise smart and intelligent, but do silly and stupid things from time to time. At work, we are constantly surprised by people who have brilliant mind, but doing simple mistakes. No different at home with people who we appreciate and look up to for their intelligence, slip on simple things. It begs a serious question, why competent people commit such simple mistakes?
This syndrome is more acute in the serious world of business and investing. Countless cases of otherwise successful businessmen or seasoned investors making bad decisions carried away by fear and greed. What explains all these? Simple reasoning that they get blinded by emotions (behavioral flaws) doesn’t fully explain the dynamics behind this ever recurring theme.
Where does one look for answers? This is where the understanding of cognitive process of the mind could help. As Zen teachings say, cognitive process is not independent and it is conditioned according to one’s bias, prejudices and fear. The process is a huge distorting machine leading to delusion rather than reflection of reality. Take for example, the views, the thoughts and the perceptions. They feed-in each other in a self-fulfilling fashion. The way one “perceives” conditions “thinking” and the way one “thinks” conditions “views”. In turn, the way one “views” things conditions the “perception”. The whole thing works in a self-feeding loop to create self-deception. In this way, one can’t trust thoughts, views and perception because they are bent by the conditioning according to the bias, prejudices and fear. It is like having a lens that bends everything that falls on it according to what one wants to see or doesn’t want to see (underlying bias). This is how all cognitive biases work to blind otherwise smart people to slip on simple things.
How is this related to “sitting tight” phenomenon that we started this piece with? In sitting-tight, the cognitive biases come in various forms to make that process difficult. The most dominant ones are, the fear of further fall, self-doubt, recency bias (mind giving undue influence to what has happened recently), urge to see quick uptick in the portfolio, confirmation bias (getting proved right in the short-term) and loss of hope etc. They act as underlying bias to cloud the cognitive process which results in actions that otherwise look unwise. At the end of the day, one should not lose sight of the simple fact that these are cycles that eventually turn. As in the previous cycles, when they turn, the degree of bounce will be directly proportional to the extent of fall that preceded it. Who makes this simple stuff hard? The one that lies between the ears, right? If you de-clog it, what sounds simple can also become easy.
Happy Value Investing!!