Mr K’s Cognitive Dissonance

In a previous avatar as wealth management head at a Financial Services company, I've been an amused witness to behavioural peculiarities of many a stock broking client. The curious case of Mr K stands out.

Mr K, a retired fauji — and a highly intelligent and perceptive person, had a fascination for the stock markets. Having traded the markets for close to two decades, he was no stranger to its vicissitudes. However, he suffered from what I like to call the "cognitive dissonance" of the stock market investor.

For those who aren't aware; cognitive dissonance is a term used to describe the general state of unease that arises from harboring one or more beliefs that conflict with each other. For instance: you may believe that it's important to protect the environment, but drive a gas guzzling SUV yourself. Or you may be a so-called animal lover who affectionately pets roadside goats, only to dig into succulent mutton biryani later that evening. Mr K suffered from a similar affliction.

For starters, he knew deep down that the only sustainable way to create wealth from the stock markets is to buy reasonably priced stocks of companies with bright prospects, and hold onto them for a good length of time. But even equipped with that knowledge, Mr K repeatedly succumbed to half-baked promises of astronomical returns from fresh college grads posing as expert traders. From BTST to derivatives trading, he burnt his fingers in nearly all possible ways.

Mr K was also an ardent followed of "Buffettology", quoting him verbatim ever so often. One of his all-time favorite quotes being: "In the short-term, the market is a popularity contest" (reflecting the great man's view that timing the market is nigh impossible). And yet, he once told a dealer in my team that "young man, you have my full authority to sell the stock at the day's high. You needn't even call me to confirm before you place the trade". Unfortunately, the dealer didn't have a crystal ball at hand to tell him "now, now - this is the day's high! Sell!"

Having dealt with all variants of stock market advisors over his lengthy trading career, Mr K was a discerning client to say the least; perhaps even bordering on outright sceptical (rightly so, I might add). He quite firmly believed that most young entrants into the broking space were commission focused, more often than not, their 'recommendations' arising from their own need to make you trade to maximize their turnovers, and not with your interest at the center of their dealings. Despite knowing, and opening stating the above, Mr K repeatedly appointed dubious brokers as authorized persons for his broking account, giving them carte blanche to trade on his behalf. Many heartaches and threats later, he was sometimes able to wrangle out parts of his sunk money, but the cycle kept repeating itself.

Mr K's story is not an isolated one; each year, thousands of retail investors lose money (or fail to make money) in the stock market despite possessing more than adequate knowledge and common sense. What about you — do you often invest near the peaks despite knowing the risks, only to start hyperventilating when the Nifty drops 500 points immediately after? Do you lose big every month by punting on Bank Nifty futures - though you firmly believe that short term trading produces losses? Do you often miss the bus after a 30 per cent market correction and regret your inertia later, though you know fully well that buying into capitulated markets is what champion investors do? Do you repeatedly succumb to the 'advice' given by rookie stock brokers who vanish in a few months, mobile phones switched off? If these sound familiar, it may be time to pause and check if your actions are aligned with your beliefs. It's time to quash that cognitive dissonance!