From all of us at CrowwdHappy Dhanteras, and a very happy Choti Diwali. Wishing you and your family a bright, safe and peaceful Diwali tomorrow.
The moment
Open any app, any newspaper supplement, any family WhatsApp forward about investing, and sooner or later you meet a list. Top funds of the last five years. Stocks that turned ₹10,000 into ₹10 lakh. People who started at 25 and retired at 45.
The lists are usually accurate. The numbers check out. What strikes me is what is not on them. A five-year list cannot show a scheme that was merged away in year three. The ₹10 lakh story does not come with the hundred others that went to zero. The early retiree is interviewed; the person who tried the same thing and quietly went back to a job is not.
Nobody is lying. The list is simply made only of what is still standing.
The lens Survivorship bias
During the Second World War, a group of mathematicians at Columbia University worked for the American military as the Statistical Research Group. One of them was Abraham Wald, a Hungarian-born mathematician who had left Vienna for the United States.
The story as it is usually told goes like this. The military studied bombers returning from missions and mapped where the bullet holes were. The holes clustered on the wings and fuselage, less so on the engines. The obvious conclusion was to add armour where the holes were. Wald is said to have pointed out the opposite. The planes being examined were the ones that came back. Planes hit in the engines were not in the sample, because they never returned. The missing holes marked the places that mattered most.
The holes you can see are the ones a plane can survive.
Historians of statistics are careful about the details. Wald's actual memoranda, published decades later, are dense mathematics on estimating how likely a plane was to survive given the damage seen on those that returned, and there is little direct record of the famous conversation. But the core idea is his, and it has a name now: survivorship bias. We judge by what made it through, and then forget that a filter was ever applied.
The second-order effect in money is quiet but large. Every track record we see has already passed through a filter. Funds that did badly are often merged into others and their history disappears from the comparison tables. Investors who stopped after a bad year do not write blog posts about it. Even our own memory filters: we remember the decisions that worked and soften the ones that did not.
Every list has already been through a sieve.
None of this means good records are luck. Some are earned. It means a record tells you more when you also ask what it was chosen from. Ten winners out of twelve tells one story. Ten winners out of three hundred tells another.
A winner means more when you know what it was picked from.
What the list shows, and what it leaves out.
| What the list shows | What it leaves out |
|---|---|
| Top funds of the last five years | Schemes that were merged or closed along the way, and their record with them |
| The stock that turned ₹10,000 into ₹10 lakh | The many that were bought with the same hope and went to zero |
| The person who retired at 45 | The people who tried the same plan and quietly went back to work |
| A long, smooth track record | The years before the record started, and the investors who left during the bad ones |
| Our own best decisions | The ones we remember more softly than they happened |
I find the useful habit is a single question, asked before admiring any list: who is missing from this, and why?
The line
What you see is all there is.
Daniel Kahneman · Thinking, Fast and Slow (2011)
The week ahead 8 to 14 November
Diwali is tomorrow, and the week after it is a short one.
| When | What | What it may feel like |
|---|---|---|
| Sun 8 Nov | Diwali. Muhurat trading session, 2:20 pm to 3:30 pm | A festive hour that gets read as a signal |
| Tue 10 Nov | Markets shut for Diwali Balipratipada | A quiet day in the middle of the week |
| Up to 14 Nov | September quarter results continue ahead of the filing deadline | A daily stream of best quarters and biggest jumps |
Diwali and results season both produce their own lists: the best quarters, the stocks that "doubled" since last Samvat, the names everyone is talking about for the new one. It may feel as if everyone else picked the winners. It is worth remembering that the headlines are written about the planes that came back.
One question
Think of an investment story that shaped how you invest. Who might have tried the same thing and never told anyone how it went?
Until next Saturday, and Shubh Deepavali,Ajitesh