When you are investing – especially in equities and real estate – you get to hear a lot of stories. Some true, some exaggerated, mostly untrue.

However even when you hear a story that is untrue after sometime you start believing that they were true. Look at the number of Akbar Birbal stories, Tenali Raman stories, etc. There is no way you can even check them for veracity. However, it is all registered in our minds. Look at some of the “postulates” (remember from school?) that we heard or believe. At least I have seen people believe these postulates for long periods of time:

1. Real estate cannot ever go down
2. Gold always goes up over long periods of time
3. Gold will never lose value especially in an inflating economy
4. Interest rates can never be negative
5. Equity will ALWAYS outperform debt over long term
6. Market crashes are temporary
7. Equity markets are risky
8. Debt instruments like Gilt have NO risk
9. There is a pattern in market movement

This is a short list – please post in the comments column if you have heard more! The problems with narratives is that we can talk ourselves into something. For example we talk ourselves into believing that Tatas are a great group, credible, and above board in governance. When we get instances like Tata Finance, Tata Communication, etc. we conveniently ignore because it goes against the narrative that we believe. Ditto for Hdfc group. The only instance of insider trading in the mutual fund industry (which got reported I mean) happened in Hdfc mutual fund. However, I am not sure how many of us remember that incident. That is why a narrative is important.

As investors we should see the narratives in our head. It makes us pay irrational prices for shares. Tata steel, Hindalco, Hdfc, get higher PE than many of their far more efficient peers. Be careful what the guy sitting in your head is telling you. Listen carefully, and analyze well before you believe him (I am assuming it is not a her!). If you see the narratives (History, my friends, History) during the years 1927, 28, 29…you will feel that the great Depression was welcomed! The churches were against ‘conspicuous consumption’. So when the markets went down the churches rejoiced saying “this was bound to happen”. We ‘narrated’ our selves into a depression. Now hear the narrative in our media. We all have to believe that we are in a recession. So a news story like “Reliance grew at 27%” is told to you as “Inspite of India being in a RECESSION ..Reliance grew at 27%”. So the recession is being reiterated and the 27% is being made to look like a MISTAKE or an aberration! Decide for yourself. Don’t let the media tell you a non-existent story. It could even be dangerous for your relationships. Imagine your wife tells you “Despite the fact that  your sister (mother, brother, friend…) not liking you she has invited you for her son’s wedding”. See how the narrative and choice of words can be dangerous?

So you should be worried about the economists, and the media. Both have no ability to process data nor the balls to accept that they were wrong.

Fear the man (woman) who does not admit to his/ her mistakes. And of course beware the story teller!