In the recent World T20 final, southpaw Kumar
Sangakkara’s blistering knock helped Sri Lanka triumph over India. Playing his last
international T20 match, Sangakkara had had a rather indifferent run coming
into the final. But on the day, his batting display meant that all skepticism
surrounding him vanished and the clichéd maxim “form is temporary, class is
permanent” was back in circulation.
In the same match, another southpaw Yuvraj
Singh had a bad day at the office. To put it mildly, he was woefully out of
sorts with the bat. As a result, he found himself at the receiving end of a
barrage of criticism; even as I write this post, critics are busy writing his
cricketing career’s obituaries. Though Yuvraj has proven credentials as a match
winner, not many seem willing to offer the “form is temporary …” defense in his
favour, at present.
To my mind, the diverse reactions can be
attributed to a recency bias. The accolades for Sangakkara and criticism for
Yuvraj have more to do with their performance
in the final match, rather than an accurate evaluation of their
cricketing prowess. Both Sangakkara and Yuvraj are unquestionably talented
batsmen with impressive careers to show for. But for now, most believe that Yuvraj is a 'has-been',
while Sangakkara is a 'class act'. And what’s driving this belief—the players’ showing in the most recent match.
The recency
bias can manifest itself in investments as well. If markets have been on an
upswing in the recent past, investors are more likely to believe that they will
continue to move northwards going forward as well, rather than otherwise.
Likewise, a stock or sector which has hit a purple patch lately will often
inspire more confidence in investors rather than one that has underperformed
recently.
O
Prashant, Where Art Thou?
In the latter part of 2013, I was
addressing a gathering of mutual fund distributors, advisors and investors. Things
became interesting when the conversation veered towards funds run by portfolio manager Prashant Jain i.e. HDFC
Top 200 and HDFC Equity. To
clarify, I thought (and continue to think) highly of those funds and the
manager in question. But then, I was in a minority. The funds were having a
terrible run in 2013, underperforming both their respective benchmark indices
and comparable peers. The
audience was at its vitriolic best: Theories such as the manager doesn’t
churn the portfolios enough, the funds are too large to perform, and the manager is
a spent-force were put forth by the audience to rationalise the
underperformance.
Prashant
Ahoy!
Oddly, at present (i.e. roughly six months later), Jain and his funds are being eulogized
by the same set of distributors, advisors and investors. And what has changed
between then and now–the funds have clocked a strong showing and emerged
among the best performers in a peer-relative sense. Is that surprising? Not
really. Broadly speaking, the manager has been betting on a turnaround for a
while now and had positioned his portfolios accordingly. Expectedly, while the
funds struggled for a better part of 2013, they staged a comeback of sorts in
the present market upturn.
Is
it Heads or Tails?
Here’s what makes the funds tick: Jain
easily ranks among the best portfolio managers in the country; he plies a
robust investment process and is backed by a fund house which has
a reputation for safeguarding investors’ interests.
The aforementioned factors existed
when the funds were underperforming, and they continue to be present now too, when the funds are
outperforming. All things being equal, a
year or so of underperformance doesn’t turn a good fund into an inferior one; likewise, outperformance over a six-month
period doesn’t convert a mediocre fund into a superior fund.
Yet, we
have seen the manager and his funds go from vilification to glorification in a
six-month period. This is irrational behavior at its best which can be attributed
to the recency bias. I shudder to think of the reactions that will follow, if Jain’s
funds were to underperform over the ensuing six months.
What
investors must do
Resist succumbing to the recency bias
while investing. Think about it: you might exit a sound investment avenue with
solid long-term prospects because of short-term underperformance. Conversely,
by blindly chasing an investment which has fared well you may run the risk of making
an overpriced buy or even one that is unsuitable for you. Maintain a long-term orientation while investing;
it will help you block out all the noise which prevails in the near-term.
Also, learn to look beyond just performance while making investment decisions.
Rather focus on what makes the investment avenue tick to better understand when
it is likely to fare well and otherwise. This in turn will help you make
informed investment decisions, independent of recent performance.
On a lighter note, a word of caution for
those writing off Yuvraj based on one poor showing—the humble pie isn’t particularly
palatable!
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