9. The psychology of the Indian investor

Part 13 of 19 in The Patient Owner: Charlie Munger’s Ideas, as Rakesh Jhunjhunwala Might Have Taught Them to an Indian Investor← Part 12Part 14 →

This chapter explores the psychological tendencies that influence Indian investors, drawing from Charlie Munger's insights on human misjudgment. It highlights how these biases can impact financial decisions and offers ways to recognize and mitigate them.

Aniruddha. Munger’s talk on human misjudgment is the part of the almanack that ages the least. He listed tendencies, not sins: reward and punishment, liking, disliking, doubt-avoidance, inconsistency-avoidance, curiosity, envy, social proof, authority, availability, over-optimism, deprival, contrast, stress. He warned that when several fire together you get a lollapalooza, a result you will not believe if you study the biases one at a time. Translate the list into a WhatsApp group.

Rakesh. With pleasure. And with no illusion that I was exempt. Exemption is how the list gets you.

Twelve that will actually cost you money here

Reward super-response. The distributor of a new fund is paid to place it. The relationship manager is paid to churn a meeting into a product. The founder’s employee stock option is paid to describe the future in the present tense. Ask who gets paid if you say yes this week. Then ask who gets paid if you say yes in a year. If the first number is larger, you are the product.

Liking. You will forgive a promoter who remembers your child’s name. You will not forgive a dull company that never calls. This is why boring compounders are under-owned by intelligent people. Intelligence does not protect you from wanting to be liked back.

Disliking. A sector you have decided is ‘old India’ can hide a perfectly good tollbooth. Contempt is not research.

Doubt-avoidance. The IPO closes on Friday. The group has already invested. The discomfort of not deciding is sharper than the discomfort of a bad price. The brain will end the discomfort. That is its job. Your job is to notice that the deadline was designed.

Inconsistency-avoidance. You bought it, therefore it is good, therefore new evidence is a quibble. Doctors do this with a first diagnosis. Investors do it with a first tweet. Write the exit fact down before the purchase so that your yesterday cannot cross-examine your today.

Envy. This one runs India. A cousin’s multibagger is a medical emergency in some families. Envy collapses your time horizon to his time horizon. His may have been luck, leverage, or a lie. You cannot see which from the wedding.

Social proof. ‘Big people are in it’ is not a cash flow. It is a queue. Queues feel like evidence. They are evidence of a queue.

Authority. A minister’s visit to a factory, a famous investor’s name on a cap table, a television anchor’s tone. Authority is a shortcut the organism uses when it is tired. You are often tired at the exact moment a decision is offered.

Availability. The crash you remember, the scam your uncle suffered, the stock that was on the front page this morning. Available memories feel probable. Base rates feel abstract. Prefer the abstract. It has no interest in your evening.

Over-optimism. He said in public, more than once, not to expect the equity market to be a machine for returns above the teens, and not to treat it as a gambling venue. A systematic plan over eight, ten, fifteen years was his version of humility for the person who is not a full-time investor. Optimism about India is rational. Optimism about your own timing is a hobby.

Deprival super-reaction. Losses feel larger than gains of the same size. You will sell a future Titan to ‘lock in’ a feeling, and you will hold a future Satyam to avoid admitting the loss. The two errors look opposite. They are the same muscle.

Stress and contrast. After a 40 percent fall, a price that is still absurd looks like a gift, because the mind compares it with last month rather than with the cash. Contrast is how shops sell. It is how issues are priced against a private round rather than against profit.

Aniruddha. The lollapalooza in Indian dress is easy to cast. A charming founder, a famous angel, a closing date, a cousin, a falling-then-bouncing chart, and an app that congratulates you for acting. No single item is a fraud. Together they are a machine for bypassing the checklist.

Rakesh. Charlie’s remedy was not to become a stone. It was to know the list well enough that you feel the tug and call it by its name. Named tugs are weaker. He also thought the tendencies were mostly useful — you cannot live without trust, curiosity, or a willingness to decide. The work is to notice when a useful tendency has been hired by someone else’s bonus.

Emotional investment is a sure way to make a loss in the stock market. — Rakesh Jhunjhunwala, public interviews

Evening question. The next time you want to buy something this week, name the three tendencies in the room. If you cannot name them, the room is running you.