stock markets: the superhero trap in investing and how to overcome it

I love superhero stories. Here is one.

Phoebe Garrett lay down in a chair at the clinic. She remembered what her mother had told her: “Our family never gets the flu. A live virus leaked into his nose and his nostrils were blocked for several hours. It was an attempt at self-infection, part of a voluntary attempt to participate in a study that aimed to find out why some people were not infected with SARS-COV-2, the virus responsible of the coronavirus disease Covid-19. After the experiment, there were several rounds of testing through various methods: throat swabs, nasal swabs, other types of swabs like nasal wicks – where you hold a swab in your nose for a minute – along with blood tests. She never developed symptoms, never tested positive.

Garrett wasn’t the only one taking the test. Of the 34 people exposed to the virus in this experiment, 16 did not develop an infection. Researchers have tried to locate more of these people, particularly those who lived with Covid-positive patients but did not catch the infection.

I love these superhuman stories. Not you ? It opens a window of hope.

The story does not end there. Over the following months, all participants in the experiments underwent repeated testing. Unsurprisingly, almost all of them tested positive at different times. After dodging the virus for nearly two years, Garrett was shocked when a routine lateral flow test produced a worrying second red line. Shortly after, she developed mild symptoms of Covid. She has since recovered.

Most of us believe in the superhuman. It’s magnetic. We believe in people who tell us that it is possible to do in a month what the “alpha investor” has done annually for the past seven decades. It’s a trap.

While a little luck and a lot of the unknown can create super-results, there’s no crazy known method, no shortcuts to ultra-results.

But there is another lesson.

Last month I had an HbA1c test. According to peer-reviewed studies, it is a fairly accurate and easy-to-administer test that can be an effective tool in diagnosing diabetes.

I asked my doctor about HbA1c. What is the most accurate way to use it? She replied that a combination of HbA1c and fasting blood glucose test (FBS) is a fairly accurate measure of diagnosis. But the most important came later. She said she would like to speak to the person taking the test before issuing a verdict. She wanted to understand lifestyle choices, family history of diabetes, other illnesses, and specifically, the person’s occupation. In isolation, she said, any pathological laboratory test has its own limitations. The clinical symptoms, in addition to the person’s history, are the context in which they want to look at the results of a pathlab. Not in isolation.

When a patient comes in with a level of 150 FBS, it means very little until the other parameters are known. The human body is dynamic; a biomarker can have multiple triggers. “It’s all connected,” said the doctor.

Most of us ignore the context and judge the pretext. Don’t.

Numbers mean nothing in isolation. Investors obsessed with a fund’s most recent performance, for example, over the past two years, confuse the results with chance. It takes at least a month to even start a startup in India, let alone get the first big sales figure. Equity investors, on the other hand, focus on what’s happening today rather than what I call “investment biomarkers.”

Investment biomarkers
Do the right mental math, the Excel sheet can wait.

Maintaining an investment framework over all the noise in the short term over and over again gets you in the long term. While an excel sheet can help you plan and indicate where you want to reach in the long term, short term spurts can only be supported by sound psychological practices. You can be completely wrong on many of your investment choices, but you can still win over time. For example, Warren Buffett has invested in over 500 companies and Berkshire Hathaway now owns over 60 companies. But the majority of his wealth was created by just 10 companies. So it’s not the Excel, it’s the mind.

Be prepared to pay a price
Why are we looking for performance? Data shows that funds with a strong underlying philosophy and those that avoid catastrophic results are best bought when they are underperforming. There is plenty of evidence to show that manager performance is cyclical. Investors end up chasing after the best funds because it is in our nature to believe that what happened recently and is happening today will continue forever. This is not the case.

Find what suits you
Here is another story:

A scorpion and a frog meet at the edge of a murmuring stream. It’s too treacherous to cross, so the scorpion asks the frog to carry it on its back. This makes the frog a little suspicious. He asks, “How do I know you won’t prick me?” The scorpion says, “Because if I do, I will die too.” This sound reasoning relaxes the frog’s nerves. So he lets the scorpion climb on top of him and they start crossing the flowing water. Halfway down the stream, the scorpion stings the frog in the back. The frog senses the onset of the scorpion’s poison and begins to sink. He managed a last breath: “Why?” And the scorpion replies: “It is my nature.

Don’t experiment with what has a noticeable history of bad calls. There are investment strategies that show excellent returns when things are going well. But they have scorpions in the wallets that will eventually sting. Trust your money to ideas that match your nature and temperament.

Invest a little more, patiently. It’s simple but not easy. Try it.

(The author, Sahil Kapoor, is Market Strategist & Head – Products, DSP Investment Managers. Opinions are personal)


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