Survivorship Bias – Page 3

Many a time, people see the face of lord or shape of the lord, shape of a heart and so on in clouds. We hear many strange voices sometimes and feel that it wants to talk to us. The human brain seeks patterns and rules. It takes one step further: if it finds no familiar patterns, it simply invents some.

In the above images, we can see different faces in clouds. But actually, there is not any real face, our imagination creates faces in it.

Investment – In the market, we are getting overloaded with lots of data and many of us try to make patterns among those data. They use such pattern for trading into stocks. But that not work forever because we have created patterns where it has no existence.

When it comes to pattern recognition, we are oversensitive. We need to regain our scepticism. If you think you have discovered a pattern, first consider it a pure chance. If it seems too good to be true, find data which is tested mathematically and statistically. Never believe in any pattern if it is not supported with enough data over a long time.

Many investors believe that the company which choose buyback as a capital allocation plan then consider that company as a good capital allocator. But do we check rather a buyback is done below its intrinsic value or above its intrinsic value? What is the intension of the company behind buyback? Does the company want to hide previously diluted equity capital through buyback? So, we need to be sceptical before considering something as it similar as we saw it.

SIMPLE IS BETTER – ISSUE -13 – BUYBACK

This entire series will be review with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.

In life, we focus more on winning, surviving rather than failure. This illusion kills our ability to calculate the probability of surviving, success. We cannot see that probability of success can be very small. We always taught about success and not taught about failure. This is known as a survivorship bias.

Many authors write a book but a few will achieve success. Thomas Edison failed many times before inventing of the bulb but today, we only remember with their success, survivor.

“I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times I’ve been trusted to take the game-winning shot … and missed. I’ve failed over and over and over again in my life. That is why I succeed.” ~ Michael Jordan

Investment – Similarly, very few have achieved success in the investment world but we overestimate the probability of success and ignore to look that many have spoiled their life. We focus on successful companies which have created a lot of wealth. When we visit any seminar or marketing people or media, they only talk about the successful companies which have created wealth but never talk about companies which have eroded wealth. Wealth creators are very few compared to wealth eroded. But we ignore the probability of losing and never try to learn from others mistakes. We all come to the stock market for becoming a next Mr Buffett but does not focus on developing ability and insights as similar to Mr Buffett & Mr Munger.

There are ~7000+ companies got listed on Indian bourse from that ~4294 companies are down almost 80%+ (many companies got unlisted or close) whereas we know that few companies which have generated wealth over a period. So ~60% of wealth destroyers are there compared to hardly ~3% wealth creators (maximum- if we see actual wealth creators for long term then that is ~1% only).

We can see that there are huge wealth destroyers companies available compared to few wealth creators. So that while investing don’t try to catch every opportunity available but prepare investment philosophy suitable to us, swing bat only when the suitable opportunity arrives. We need to prepare investment philosophy, process, circle of competence and investment style so that we can swing bat when things fall under our zone.

This entire series will be review with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.