The superhero trap in investing and how to move beyond it

Phoebe Garrett reclined in a chair at the clinic. She remembered what her mom told her: “Our family never gets the flu.” A live virus was dripped into her nose and the nostrils pegged shut for several hours. It was an attempt at self-infection, as part of a voluntary attempt to participate in a study that was aiming to find why some people didn’t get infected by the SARS-COV-2, the virus responsible for the coronavirus disease Covid-19. After the experiment, there were multiple rounds of tests through various methods: throat swabs, nose swabs, other types of swabs like nasal wicks — where you hold a swab in your nose for a minute — as well as blood tests. She never developed any symptoms, never tested positive.

Garrett was not the only one to undergo the test. Of the 34 who were exposed to the virus in this experiment, 16 failed to develop an infection. Researchers tried to locate more such people, especially those who lived with Covid-positive patients but didn’t catch the infection.

I love these superhuman stories. Don’t you? It opens up a window of hope.

The story doesn’t end there. Over the next several months, all the participants in the experiments underwent repeated testing. Unsurprisingly, almost all of them tested positive at various points in time. Having dodged the virus for almost two years, Garrett was shocked when a routine lateral flow test produced an ominous second red line. Shortly afterwards, she developed mild Covid symptoms. She has recovered since.

Most of us believe in the superhuman. It is magnetic. We believe in people who tell us that it is possible to do in a month what the “alpha investor” has done annually over the past seven decades. This is a trap.

While a bit of luck and a large amount of the unknown can create super-outcomes, there is no known method to the madness, no shortcuts to ultra-results.

But there is another lesson.

Last month, I underwent an HbA1c test. According to peer reviewed studies, it is a fairly accurate and easy-to-administer test and can be an effective tool to establish the diagnosis of diabetes.

I asked my physician about the HbA1c. What is the most accurate way to use it? She replied that a combination of HbA1c and fasting blood sugar (FBS) test is a fairly accurate measure of diagnosis. But the most important part came later. She said she would like to speak to the person undergoing the test first before pronouncing a verdict. She wanted to understand lifestyle choices, family history of diabetes, other illness and, more specifically, the occupation of the person. In isolation, she said, any pathological lab test has its own limitation. Clinic symptoms, in addition to the person’s history, are the context in which she wants to look at a pathlab’s results. Not in isolation.

When a patient walks in with a 150 FBS level, it means very little until the other parameters are known. Human body is dynamic; one biomarker can have many triggers. “It is all interrelated,” the doctor said.

Most of us ignore the context and judge the pretext. Don’t.

The lesson
Numbers don’t mean anything in isolation. Investors fixated on the most recent performance of a fund, for instance, over the last one or two years, are mistaking the results with randomness. It takes at least a month to even start a startup in India, let alone get the first sizeable sales number. Equity investors, on the other hand, focus on what is happening today rather than focussing on what I call the “investment biomarkers”.

Investment biomarkers
Get the mental math right, the Excel sheet can wait.

Sustaining an investment framework over all the short-term noise over and over again gets you to the long term. While an Excel sheet can help you to plan and point to where you want to reach in the long term, the short-term spurts can only be taken care of by healthy psychological practices. You could be completely wrong about many of your investment choices, but you can still win over time. For instance, Warren Buffett has invested in over 500 companies and Berkshire Hathaway holds more than 60 companies today. But the majority of his wealth was created by just 10 companies. So, it is not the Excel, it is the mind.

Be willing to pay a price
Why do we chase performance? Data shows that funds with a sound underlying philosophy and those that avoid catastrophic outcomes are best bought when they are underperforming. There is ample evidence to show that manager performance is cyclical. Investors end up chasing the top funds because it is in our nature to believe that what has happened recently and is happening today will continue forever. It doesn’t.

Find what suits you
Here is another story:

A scorpion and a frog meet on the bank of a babbling stream. It is too treacherous to cross, so the scorpion requests the frog to carry him across on its back. This makes the frog a little suspicious. It asks, “How do I know you won’t sting me?” The scorpion says, “Because if I do, I will die too.” That sound reasoning relaxes the frog’s nerves. So he allows the scorpion to climb on him and they start across the flowing water. Halfway across the stream, the scorpion stings the frog in the back. The frog feels the onset of the scorpion’s poison and starts to sink. He manages one dying breath: “Why?” And the scorpion replies: “It is my nature.”

Don’t experiment with what has a perceptible history of talking bad calls. There are investment strategies that show excellent returns when things are going great. But they have scorpions in the portfolios that will eventually sting. Entrust your money with ideas that suit your nature and temperament.

Invest a little more, patiently. It is simple but not easy. Try it.

(The author, Sahil Kapoor, is Market Strategist & Head – Products, DSP Investment Managers. Views are personal)