Can Binjin be the next Warren Buffett ??

1. Emotional Biases of Investors By M.Yasodhai

2. Can Binjing be the next Warren Buffet?? Lets see

3. Mr.Binjing: A highly ambitious man 45 yr IT professional, survived by his wife and 2 boys Recently, he was rewarded bonus and modest hike in his salary . Since then he bought a 5 bed room flat ,a sudden jump from a 2 bedroom flat with a huge EMI per month which leaves no room for saving. His two children will enter into college in 4 years time,he assumes by that time he will get a salary hike and a similiar bonus too. ..is he emotionally biased

4. Examples of lack of self control: Enrollment in Gym and never turning up Obese people fail to cut back on food consumption Smokers continue to smoke even though aware of long term health risks When ample of things to be done ,but still wasting time in FB ,whatsapp etc People may know they need to save for retirement, but they have difficulty sacrificing present consumption because of a lack of self control on current spending From Behavioral Finance jargon he has be diagnosed with . Self control Bias : He has a strong desire to consume today, which can be counterproductive to attain his long term financial goal.

5. Despite a net worth measured in $$$billions, Warren Buffett earns a base salary of $100,000 a year at Berkshire Hathaway. It's a salary that has not changed in 25 years. A man of simple tastes, Buffett easily supports his modest standard of living with this salary. He lives in the same five- bedroom house in Omaha that he bought in 1958 for $31,500. .this is Mr.Buffett

6. Emotions in advertisements.

7. Other habits of Binjing.. His favorite pastime is stock investment, calls himself as a long term investor like Mr.Buffett . he watches his portfolio of stocks daily and keeps readujsting according to the latest hot recommendation available on TV ,but then At times, his positions shows below his cost price but still waits for his shares to breakeven ,even if he knows that some of the companies which he holds is experiencing permanent difficulties ,he assures himself that miracle happens everyday and some day those companies will be hale and healthy. Now What.

8. ....he has been diagnosed with Loss aversion Bias: The pain of loss is far greater than the enjoyment of a gain. Holding loss positon longer than justified by fundamental analysis and selling winner too quickly . makes investors unduly conservative eg: holding 30 to 40% in bonds where the time horizon is deacades Sitting on huge losses and not admitting making mistake on stock selection ,but if dont sell a mistake ,you are potentially giving up a gain that could be earned by reinvesting smartly. Regret Aversion (Herding Behaviour): to avoid regretting latter they buy the popular opinion and tell themselves they are not to blame if others are wrong too.

9. What Buffett has to say. He says ..Investors dont need extraordinary intelligence, but they do need to be able to watch their holdings halve in value without becoming panic-stricken, if the holdings has sound fundamental analysis. When stock markets crashed on Black Monday in 1987, Berkshires share price suffered its biggest-ever one-day fall, plunging 18 per cent and denting Buffetts fortune by an estimated $347 million. Buffett shrugs off these paper losses; in his 1987 annual letter, he did not even refer to Black Monday. This approach has served him well, with Berkshires share price soaring from $2,675 in 1987 to last Decembers all-time high of $229,000.

10. Any other biases?? His friend who works for a Bio tech firm sometime back told him about his firms breakthrough in a new technology which is in a development stage and very much confident of its success Binjing assumes his friend must have vast knowledge of his company since he is a long term employee and buys the shares of this firm without a second thought. Also , Binjing believe he has a superior ability to beat the market most of the time . Yet again, Binjing has been possessing . Over confidence bias: He thinks his friend knows everything about the current situation of that Bio tech company and he fallaciously equate the quantity with quality of information .He is underestimating risks involved and overestimate expected returns. Beleiving they can pick stocks that will deliver superior future performance without any supporting evidence .

11. This is Warren Buffett Buffett adamantly restricts himself to his "circle of competence" - businesses he can understand and analyze. As Hagstrom writes, investment success is not a matter of how much you know but rather how realistically you define what you don't know. Buffett considers this deep understanding of the operating business to be a prerequisite for a viable forecast of future business performance. After all, if you don't understand the business, how can you project performance? Buffett's business tenets each support the goal of producing a robust projection. First, analyze the business, not the market or the economy or investor sentiment. Next, look for a consistent operating history. Finally, use that data to ascertain whether the business has favorable long-term prospects.

12. what can be done Perform post-investment analysis on both successful and unsuccessful investment. Was the investment bought at a particular advantageous time based on fundamentals or was a luck during market upswing. Errors made during time to sell or was the market going through a correction. During unprofitable decisions, look for common mistakes which the person was unaware of making

13. OMG!!! Binjing possess Endowment bias too.. He inherited large number of securities when his Uncle died 5 years back Now the company crossed its high speed of growth and in declining phase and some gossips about the management involvement in fraudulent activities so the share prices now only represent 8 times its cost price and 2 years back shares touched its life time high ( i.e almost 20 times the cost price ) . He is still reluctant to sell his shares because he fear that the position will increase in value someday and may regret having sold it.

14. Endowment Bias: Where people value an asset more when they hold rights to it than they do not. Binjing must know the purpose of the holding the inherited security ,was that on the basis of fundamental analysis or being emotional with the security. When financial goal are in jeopardy ,emotional attachment must be moderated. Buffett contends that the key to overcoming emotions is being able to retain your belief in the real fundamentals of the business, and don't get too concerned about the stock market. More than anything, investors' own emotions can be their worst enemy.

15. One fine day he realizes, that he is no where near to his LT goal and the only thing which he has common with Buffett is his recently bought 5 bed room home . So what is hindering him from becoming the next Warren Buffet : Self control Bias Loss Aversion Bias Regret Aversion Bias Overconfidence Bias Endowment Bias

16. So how can we help Mr.Binjing . Its difficult to make him the next Buffett but we can definetly save him from going bankrupt (if this situations continues) ,by educating him on his emotional biases. The more we are aware of the emotions we posses towards the investment/finances ,we can limit the poor investment choices to manifold. We must ask him to define his long term and short term goals in quantitative terms rather that qualitatively and it has to reconcile with his risk tolerance . In term of investment time horizon he has three stages ,first stage is 4 years where his both sons will be entering college and his second stage is till his retirement .Third stage is retirement period. He need to decide what is the retirement amount he wants in his retirement portfolio to have in 15 years time and it depends on the how much he would save during his working period.

17. Failing to plan is planning to failplan before its too late

Can Binjin be the next Warren Buffett ??

Economy & Finance

salary hike

warren buffett

base salary

years time

lack of self control

self control bias

time horizon

investors dont