I walk into a class of advisers / investors / students and ask them one question. The answer I get ranges from Rs. 2 crores to about Rs. 200 crores.

It is wrong of course.

I then ask them ‘How wrong do you think you can be’ and for that the answer is ‘In a worst case scenario about 20%’.

That means that the person thinks the correct figure is Rs. 240 crores. At worst.

Actually the correct answer is Rs. 1900 crores.

What makes a person so confident of the WRONG answer that he knows? he can actually calculate with a simple excel tool (of course I am asking him to do Mental Math).

I am not worried about the wrong answer. I am worried about the misplaced confidence. Or Overconfidence.

Seriously, there seems to be no cure for this kinda overconfidence.

Welcome to the world of Confirmation Bias.

You have to learn to ignore the YES-MAN in your head too! It is not easy, I can assure you.

When somebody who has earned good profits for you in the past asks you to buy some shares you do it, even if it goes against your grain. (I recently bought a Nbfc shit, despite knowing it was a shitty group, run by greedy professionals who had NEVER created wealth in the past. Even worse, they were womanizers). BROKE MY OWN rules, but I got carried away…by this guy. Well, well, we all live to learn do we not? And this from me, and I have been in the markets since 1979. Go calculate.

I can find exactly 1 million reasons why I did this deal EXCEPT the real real truth: Greed and Confirmation bias. Believe me this was a small deal, and the profit or loss will not change anything in my life, but I did fall for this bias. Stupid, but did it.

How to deal with it? Tell yourself that you can go wrong say 10, 20 or 25% of the times. See at what stage you will jump ship.

Say you bought a share at Rs. 200. You had done a few deals earlier where you had gone right. Here, you are a little worried and iffy. Keep a strong stop loss – in terms of time and/or in terms of money. Say 6 months, if this share does nothing, you will get rid of it. Or at Rs. 175, you will jump ship. Assuming of course it is a delivery based trading call. If you do not do these things, you tell yourself another lie. It is called CONFIRMATION BIAS, and lying to yourself:

• it is at 166 now, so what it will come back to Rs. 200
• I can afford the loss
• I will keep it for the long term, it is bound to do well
• it belongs to a good group, just the employees are womanizers

all bullshit. Lying to yourself, to handle the confirmation bias.

Go and ask the analyst why did he really recommend. I suggest this is easier said than done. You have to assure him that you will not hold it against him. The same analyst had asked me to buy Mindtree at 445 in Sep 2017. I did not hold that against him. Last week i exited at 1049. Not a bad deal, right?

Yes of course things can go wrong. If you do not know how, why, or because of what, you will lose money, and the learning.

Every transaction is an opportunity to learn.

Let me tell you a LUCK story. I bought Kwality (dairy company) at Rs. 40 and sold it at Rs. 150 because I read that there was some family trouble. There was a huge temptation at 114 to buy it back. The same analyst said there is too much selling pressure, let us wait. I waited. Still waiting. Price is Rs. 12.

So this guy is allowed a couple of mistakes, right?

WRONG. I am taking the risk with my money.

I have to do a ctl+alt+del in every transaction. Not doing that leads to Confirmation Bias.

Get it?