The Hindu Business Line : Before you pet a rhino

To succeed in the markets, you need to steer clear of `inappropriate reactions' and move on to `informed discussion'. Peter Stanyer tells you `how', in Guide to Investment Strategy from Viva (www.vivagroupindia.com).

Get the big picture of `spectacular losses' in Chapter 1. They are of three types. The first is about `investors who fully understand the risks they are taking, and against their better judgment, they deliberately gamble and the gamble fails'. The second type happens in `a concentrated position' established on the faith in a particular investment story, even as `the benefits of diversification are dismissed as holding back the prospects for rapid wealth accumulation'.

And in the third category of spectacular losses are investors who would probably have altered their risk exposure `if only they had had adequate information'. Uncertainty caused by poor information is never likely to be rewarded, says Stanyer. "No investor needs to take this risk, though it may be reasonable to accept less than full transparency for a small part of an investment strategy."One may argue that unusual risk-taking is rewarded rather than penalised. That's a `real problem,' frets the author. But don't draw the wrong conclusions about the good times, he warns. "This theme is captured by a photo at the front of Frank Sortino's and Stephen Satchell's book Managing Downside Risk in Financial Markets. It shows Karen Sortino on a safari in Africa, petting an intimidating rhino. The caption underneath the photo reads, `Just because you got away with it, doesn't mean you didn't take any risk.'"

Understand your behaviour, urges a chapter on `Behavioural Analysis'. Benefit from the insights of behavioural finance. Let that not, however, be an excuse to ignore "the fundamental principles of diversification, correlations between different investments, or the need to tailor policies to the time horizon of investment objectives," Stanyer cautions.

A common bias among investors can be `self-attribution', which occurs when one is `systematically overconfident' in the reliability of one's own judgments in assessing `the chance of something happening or not happening'. Check, therefore, if you attribute to your own `innate ability and unusual skill' any success that comes your way. "For example, individuals who are unusually well paid might interpret this as evidence of their own unusual ability." A dangerous corollary of self-attribution is `the natural tendency to attribute any disappointment to bad luck rather than a lack of skill', even as those around you knew that the disaster was just `waiting to happen'!

Compulsory read.

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