Investor, You Failed The Psychology Test!: A Safal Niveshak Special Report Exclusively For Subscribers of

A SAFAL NIVESHAK SPECIAL REPORT
Exclusively for Subscribers of The Safal Niveshak Post
Investor, You Failed

the Psychology Test!
Results of Safal Niveshak’s
Investor Psychology Survey
www.safalniveshak.com
Results of Safal Niveshak’s Investor Psychology Survey
One-Year Course in Value Investing

Subscribe to The Safal Niveshak Mastermind, my one-year course
to help learn the art of Value Investing, so that you can reinvent
how you invest, and create your financial freedom.
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www.safalniveshak.com Page 2 of 33
Foreword
“A human being is a dark and veiled thing; and whereas
the hare has seven skins, the human being can shed
seven times seventy skins and still not be able to say:
This is really you, this is no longer outer shell.”
This is what the noted German philosopher and poet

Nietzsche said, and this is what the Austrian neurologist
Sigmund Freud agreed – we are ignorant of ourselves!
And the biggest problem with such ignorance is that it is just so expensive.
Now, even Darwin struggled to explain why we would evolve a response that lets others know
that we have cheated or lied. Darwin would be trembling in his grave knowing how easily we have
learned to cheat ourselves.
In search of proof how often and blatantly most of us, as investors, cheat ourselves, I set up Safal
Niveshak’s Investor Psychology Survey that was conducted over the past few days.
The results are not surprising, and prove that we, as investors, are really ignorant of
ourselves…and thus often cheat ourselves!
Safal Niveshak’s Investor Psychology Survey – Results

A total of 310 people participated in this survey, and here are the question-wise results…
1. When considering the track record of an investment, I put more weight on how it has
performed recently versus how it has performed historically.
As per the results, a majority 69% of readers believe that they look at the long term history of an
investment’s performance and not how it performed in the recent past.
So, only 31% were honest that they fall for the Recency Bias – the more recent the information,
the better we remember it – which is otherwise so widespread in investing!
You see, our short-term memory file cabinet, if there were such a thing, contains very little extra
space. So when we receive a new piece of information, we have to remove an older piece to
make room for the newer piece. That causes the recency bias.
But 69% of those who participated in this survey failed to acknowledge its presence during
investment decision making!
2. When a stock from my portfolio is not doing well, I usually seek information that
confirms I made the right decision about it.
52% of the participants agreed that that suffer from Confirmation Bias after making an
investment, by seeking information or others’ opinions that confirms they made the right decision.
The remaining disagreed!
Warren Buffett says – “What the human being is best at doing, is interpreting all new information
so that their prior conclusions remain intact.”
Whether you go through life believing that “people are inherently good” or “people are inherently
bad”, you will find daily proof to support your case.
Rolf Dobelli, in his amazing book The Art of Thinking Clearly, writes…
The Internet is particularly fertile ground for the confirmation bias. To stay informed, we browse
news sites and blogs, forgetting that our favoured pages mirror our existing values, be they
liberal, conservative or somewhere in between.
Moreover, a lot of sites now tailor content to personal interests and browsing history, causing new
and divergent opinions to vanish from the radar altogether. We inevitably land in communities of
like-minded people, further reinforcing our convictions – and the confirmation bias.
Just look at your past investment decisions and you would know that you often try to seek
confirmation for the decisions you have taken. Most investors do. But still a large number – 49% –
don’t agree they do!
3. When thinking about selling a stock, the price I paid is a big factor I consider before
taking any action.
This was a shocker! A majority 53% think they don’t consider the past stock price – like the
stock’s recent price or the price they had paid to buy it – while making their investment decisions
today.
Now, that proves behavioural scientists like Daniel Kahneman, Robert Cialdini, and Dan Ariely
are wasting their time studying and proving that Anchoring Bias is widespread!
You’d often hear yourself saying…
• “I will not sell this stock till I get my cost back.”

• “This stock, at its 52-week low, looks very cheap.”
• “This stock has not fallen to my last buying price, so I will not buy it till it falls there.”
• “This stock has already doubled from my buying price, so I must sell before it falls.”
• This stock has already fallen 90%. How much more can it fall?”
With respect to your last point, dear friend, a stock that falls from Rs 100 to Rs 5 first fell 90%,
and then another 50%.
So, the truth is that anchors abound, and we all clutch to them. But most of us would still disagree
that we fall for this trap!
4. I don’t easily change my views about investments once they are made.
“It is easier to resist at the beginning than at the end”, said Leonardo Da Vinci.
People at the racetrack are much more confident of their horse’s chances of winning just after
placing a bet, then than they are immediately before laying down that bet.
In the same way, I will find a stock more promising after I’ve bought it, than I did before I’d bought
it.
Commitment and consistency bias lies deep within us, directing our actions with silent power.
It is, quite simply, our nearly obsessive desire to be (and to appear) consistent with what we have
already done.
So, once we make a choice or take a stand, we will all kind of pressures to behave consistently
with that commitment. Those pressures will cause us to respond in ways that justify our earlier
decision.
This is how most investors behave, but about 50% of them don’t know this for a fact.
5. I am confident that my investing knowledge is above average and I can accurately

predict how my investments will do.
“Man suffers much,” said Russian-British philosopher Isaiah Berlin, “…because he seeks too
much, is foolishly ambitious and grotesquely overestimates his capacities.”
So, when things go right with us, we think “we made the right decision”…and when a thing does
not work out fine, we believe it was “because of bad luck, bad economy, or bad market”.
Thankfully, a large majority – 78% – disagreed that their investing knowledge is above average
and they can accurately predict how their investments will do. So they don’t suffer from Over-
Confidence Bias!
Here again, a majority has proved how whimsical behavioural studies are that think people are
generally over-confident, despite the fact that all men think all men are mortal but themselves.
So while research has found that…
• 82% of people say they are in the top 30% of safe drivers
• 80% of students think they will finish in the top half of their class
• 68% of lawyers believe that their side will prevail
• Doctors consistently overestimate their ability to detect certain diseases
• 81% of new business owners think their business has at least a 70% chance of success,
but only 39% think any business like theirs would be likely to succeed
…participants in the Safal Niveshak survey are not an over-confident lot. And that’s again
interesting!
6. I often find that many of my best-performing stocks were bought based on my own
decisions, while those that did not work out were based on tips from others.
Again, 50% investors who participated in the survey believe that they don’t suffer from a Self-
serving Tendency.
This is very close to the Overconfidence Bias, we discussed in the previous point above.
So when we fail, we blame external circumstances or bad luck. And when others are successful,
we tend to credit their success to luck and blame their failures on foolishness.
Remember when you got an A+ in school, you thought you were solely responsible and the top
grade reflected your intelligence, hard work, and skill. But when you scored a B or a C, the test or
the teacher was clearly unfair.
When our investments turn into losers, we had bad luck or we blame the stock markets or Safal
Niveshak for “recommending” bad stocks. When they turn into winners, we are geniuses.
This way we draw the wrong conclusions and don’t learn from our mistakes. We also
underestimate luck and randomness in outcomes.
But 50% investors, as per the survey, don’t believe they have this tendency.
7. If an investment makes sense to me, I often take action on it right away.

A clear majority – 62% – believe they easily jump to conclusions, and thus suffer from First
Conclusion Bias, which is an honest answer, as proven by behavioural scientists.
Our minds jump to conclusions, and we tend to solve problems by using the first solution that
comes to mind.
Charlie Munger often says that “to a man with a hammer, everything looks like a nail.”
Prof. Sanjay Bakshi gave a real life example in his interview with Safal Niveshak…
Let me give you an example of this from my own experience, as to why first conclusions are often
wrong.
Let’s go back to the year 2003. This was the time when the steel industry was down in the
dumps, and it was about to take off for a very big bull run. At that time, some of my value investor
friends and I came to the conclusion that steel prices are going to go up. This was a time when
most steel companies in the world were losing money. In fact, there were just a handful of
companies that were making any money.
The steel cycle had been down for a very long time. We felt that here was a tipping point coming
and things would get better, and steel prices will go up because steel capacity is getting tight and
world economy, and in particular, Chinese economy, is growing. Therefore, we thought there was
going to be a shortage of steel, and it would take a long time for the shortage to go away because
steel is a long gestation period industry.
We concluded that steel companies would benefit because of the huge rise in steel prices, which
was a great insight. So far so good! But apart from concluding that rising steel prices must be
good news for steel stocks, we also concluded that the same would be horrible news for auto
stocks. This kept us away from auto stocks based on pure automatic first conclusion that high
steel prices were bad news for auto stocks. That first conclusion turned out to be wrong.
Think about why it went wrong. The value of an auto stock (or any stock) is based on present
value of its future cash flows. And rising steel prices may or may not be bad news so far as those
cash flows are concerned. A rising input price may be passed on to customer without suffering
any volume decline. Or the rise in volumes caused the industry growth, may more than offset the
shrinkage in margins because of a rise in input prices, which the company is unable or unwilling
to pass on to customers.
So the key factor to think about is not impact on margins but impact on cash flows. But the mind
doesn’t always do this automatically. It jumps! It jumps to first conclusions, which are often wrong.
So you really have to train yourself out of first conclusion bias. You have to avoid seeking easily
available answers to questions that begin with “why”.
The first conclusion bias really hurts investors when it comes to value traps. I say this from my
personal experience in buying a few of such traps in the past.
It is useful to think about this in the following manner. There is a universe of stocks out there. A
sample of such stocks is value stocks. A very large proportion of these value stocks are value
traps. They are cheap for a very good reason. And they’re going to remain cheap.
People make this misconception of first conclusion bias that “because it’s cheap, I must own it.
And if I own it, only good things will happen to me.”
Well, often it doesn’t!
So I feel happy to see a majority agree that they fall for the first conclusion bias. Why happy? It is
because the first step of saving yourself from a bias is to agree that it exists in the first place.
8. I sometimes get attached to my stocks, which causes me not to take action on them.
“She likes me…she likes me not…she likes me…she likes me not.” You must have heard these
statements at several instances in the past.
“Do you really like me?” asks my wife often. “Yes I do!” I tell her even more often.
The Liking Tendency is deeply ingrained in us. So, while it serves us well when it concerns
people close to us, we often fall prey to its negative effects when it concerns others.
So you may end up buying something you wouldn’t have, just because the salesgirl was
charming.
Why do you think advertising is full of attractive people? Why do you think a product like Coca
Cola – which damages your health – always shows happy people, and happy kids? Why do most
financial experts and investment bankers dress up so well while meeting clients?
It is because marketers and experts understand how people ‘like’ outwardly attractive people and
behaviour.
In investing, we like stocks we own more than if we hadn’t owned them. Despite the fact that a
stock does not know you own it, you will fall in love with it and not part with it despite knowing that
it was an ugly duckling.
Most investors behave like this. So it appears strange that a majority of those who participated in
the survey – 53% – disagreed that they get attached to their stocks.
Oh yes, it should not appear strange because, you see, we are ignorant of ourselves…and
continue to believe that we don’t have the liking tendency!
9. Suppose that you could replace your current stock portfolio by a new one. The new
portfolio has a 50% chance to rise by 50% over the next 3 years. However, the new
portfolio also has a 50% chance to reduce by X% over the next 3 years. What is the
maximum X% reduction in your new portfolio you are willing to accept?
The lower the number you chose, the more you think the pain of a decline outweighs the joy of an
increase. For instance, people who are willing to accept a maximum 25% reduction in their new
portfolio are effectively saying that the potential pain is twice as important as the potential joy.
As far as this survey is concerned, the largest number of participants chose the 10% loss
number, which shows that the potential pain of losing money is five times more than the potential
joy of earning positive returns.
This is Loss Aversion Bias at work, and it is indeed at work as the survey results show.
In fact, 72% of those who participated have chosen a potential loss of less than 25%, which
simply shows how a majority of us just hate the sight of losing money – and that is proof why we
hold on to our losers (to get our money back) and sell our winners (so that we don’t lose the
gains).
Interestingly, the most honest answer in this survey of how investors really behave came for this
last question, simply because this question does not give you “obvious” and “correct-sounding”
choices.
The Final Verdict

Here is the final results of Safal Niveshak’s Investor Psychology Survey…
Investor Beware…of Yourself

Rolf Dobelli writes in The Art of Thinking Clearly…
The Pope asked Michelangelo: ‘Tell me the secret of your genius. How have you created the
statue of David, the masterpiece of all masterpieces?’ Michelangelo’s answer: ‘It’s simple. I
removed everything that is not David.’
Let’s be honest. We don’t know for sure what makes us successful. We can’t pinpoint exactly
what makes us happy. But we know with certainty what destroys success or happiness. This
realisation, as simple as it is, is fundamental: Negative knowledge (what not to do) is much more
potent than positive knowledge (what to do).
Thinking more clearly and acting more shrewdly means adopting Michelangelo’s method: don’t
focus on David. Instead, focus on everything that is
not David and chisel it away. In our case: eliminate all errors and better thinking will follow.
This is exactly like what Charlie Munger says so often – “If you want to avoid irrationality, it helps
to understand the quirks in your own mental wiring (everything that is not David) and then you
can take appropriate precautions.”
In any investor’s learning process, there are great dangers in covering behaviour at the end
simply because how we behave matters the most in how we perform as investors.
Thus, while designing my Mastermind Value Investing Course, I have included the part on
“human psychology and investing” as the very second module.
The deeper I research for the purpose of writing out my lessons, the more I believe that without
the right investment behaviour, you will never succeed as an investor.
Many of the reasons for bad behaviour are rooted in psychological tendencies and biases that
often influence us subconsciously.
The more emotional, confused, uncertain, insecure, excited, distracted, tired or stressed we are,
the easier we make mistakes.
A Greek philosopher said this in the 2nd Century – “Why oh why are human beings so hard to
teach, but so easy to deceive.”
Eighteen hundred years later, that saying remains true!
Want to Learn the Psychology of Investing?

Join me, and 100+ fellow investors by signing up for The Safal Niveshak Mastermind – my one-
year course on Value Investing to help you reinvent how you invest to create your financial
freedom.
Click here to subscribe before admissions close on 25th August 2013.
Thank you again for being there!
About Safal Niveshak

Safal Niveshak is a movement to help you, the small investor,
become intelligent, independent, and successful in your stock
market investing decisions.
My name is Vishal Khandelwal, and I am the Founder and

Chief Tribesman of Safal Niveshak.
Before starting work on the idea of Safal Niveshak, I was working as a stock market analyst for
eight years.
During this period, I felt the pain of seeing small investors (like you) lose large amount of their
hard earned money, for reasons ranging from:
• Scams…where companies simply vanished, to

• Speculation…to earn fast money, to
• Bad decisions…mostly backed by insensible and short-term advice from self-centered

brokers and self-proclaimed stock market experts.
While the probability of a stock market analyst to work on a social cause is miniscule, here I am
driving this movement called Safal Niveshak – to help you become intelligent, independent, and
successful in your stock market investing decisions. Through my experience in the stock markets,
I have come to believe that:
• You alone are the most capable person alive to manage your money.
• Investing in the stock markets is not a rocket science. You just need to form the right habits,
and behave yourself.
• You can create a lot of wealth for yourself doing it.
You can write to me at [email protected] to know more about this initiative and how you
can benefit from it and/or support it.
With respect,
Vishal Khandelwal (Chief Tribesman, Safal Niveshak)

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A SAFAL NIVESHAK SPECIAL REPORT

Exclusively for Subscribers of The Safal Niveshak Post

Investor, You Failed

One-Year Course in Value Investing

Click here to subscribe before admissions close on 25th August 2013!

This is what the noted German philosopher and poet

Safal Niveshak’s Investor Psychology Survey – Results

You’d often hear yourself saying…

• “I will not sell this stock till I get my cost back.”

5. I am confident that my investing knowledge is above average and I can accurately

So while research has found that…

7. If an investment makes sense to me, I often take action on it right away.

Well, often it doesn’t!

The Final Verdict

Investor Beware…of Yourself

Eighteen hundred years later, that saying remains true!

Want to Learn the Psychology of Investing?

Click here to subscribe before admissions close on 25th August 2013.

Thank you again for being there!

About Safal Niveshak

My name is Vishal Khandelwal, and I am the Founder and

• Scams…where companies simply vanished, to

• Bad decisions…mostly backed by insensible and short-term advice from self-centered

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