The Hindu Business Line : Halo effect

One my friends recently joined a brokerage firm. He was good at picking momentum stocks. His boss, however, forced him to concentrate on bringing in new clients. He failed to do so because of lack of experience in marketing. Some time later, a vacancy arose for a higher position in his department. He was overlooked for the position despite having the requisite skill sets. He was told that the position required continual discussion with clients to understand their investment needs. Since he failed to bring in more clients, he was considered unsuitable for the position. You may wonder what the connection is. My friend was a victim of the "devil effect."

My friend was obviously bad at marketing. His superiors, therefore, decided that he was equally bad in discussing clients' needs. Thus, just because he was bad at a certain kind of work, he was judged to be bad in other areas as well. That is the devil effect.

As investors, we victimise companies by applying the devil effect. Suppose a sugar mill is performing badly because of poor management. There is a good chance that we may conclude that the newly promoted textile company in the group will do badly!

The company will, hence, command a low priceearnings multiple.

Of course, not all suffer from the "devil effect." Suppose the stock market likes a promoter. Even an unrelated venture floated by that promoter may get a good response from investors. This is because of the "halo effect," the opposite of the devil effect.

(The author is a Chennai-based financial consultant.)

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