High hopes, hard falls: A guide for investing beyond biases

We humans are born with emotions and gain the knowledge and analytical skills with learning, so emotions are inbuilt more inherently than intelligence.

Emotional thinking gives rise to biases. Biases in investing are mental shortcuts or emotional tendencies that can cloud judgment and lead to poor decision-making. Here’s a typical misery of a person making investment decisions while in the influence of his own biases:

During July–Sept 2024, people were buying in the market with optimism even at high valuations. At the peak, Nifty had reached a P/E multiple of 24.4 (against the current 3-year median of 21.8), Nifty Midcap 150 P/E had reached 45.7 at September-end (against the current 3-year median of 26.5), and Nifty Smallcap 250 P/E had reached 33.5, which later peaked in Dec 2024 up to 35.6 (against the current 3-year median of 24.7).

In the Defence sector as well, a price bubble was looming, which burst miserably—as from the highest level in Dec 2024, the index crashed around 29% to the bottom level in less than three months. Similar cases were witnessed in the BSE Capital Goods and BSE IPO indices.

With every new highs in the stocks and these indices, people were in a race to chase returns, amidst fear of missing out (FOMO). (Herd Mentality - tendency to follow and copy what other investors were doing, influenced by emotions and instincts.)

As the investor had earned good returns in his previous trade, he only paid heed to those speaking in favor of his holdings or who had a bullish view, and might have ignored the voices of those who cautioned him. This was a classic case of Confirmation Bias – only seeking information that confirms your existing belief, while ignoring contradictory evidence.

We even heard stories of people withdrawing money from their bank accounts and pre-maturing their FDs to investing in the market, taking higher risk and ignoring asset allocation. (Overconfidence Bias – believing one knows more than they actually do.)

And after this, with an initial retracement from the highs, the stock price seems more attractive to him, thinking it was worth more earlier, but now has become cheaper. So, he prefers to buy more looking at the past high price, ignoring the future outlook. (Anchoring Bias – relying too heavily on the first piece of information (anchor) when making decisions.)

But after witnessing a considerable correction in the stock, he feels stuck with his holdings but can’t make up his mind to book a loss and exit, even though that amount could be used to invest in another opportunity. (Loss Aversion – feeling the pain of losses more strongly than the pleasure of gains.)

Then, on an even further price slide, it reaches an ultimate panic level. He just observes how fast the wealth has been eroded. Recently, Nifty logged continuous decline for five straight months from Oct 2024 to Feb 2025, falling over 14%. Worse for Nifty Midcap 150, which fell 20%, and Nifty Smallcap 250, which fell 25% over the same period. Even more tragic at the individual stock level—some of which saw around 40% drawdown.

In such panic and pessimistic sentiment, even for stocks which are of good quality and had strong financial performance in the past, he thinks only to exit from all—even though historically, the market has recovered from each fall. (Recency Bias – giving more importance to recent events than historical trends.)

Though, some stocks he would continue to hold, believing the chaos and market volatility would settle down in some time and sentiment would revive again.

Then recovery starts coming in some sectors, as happened in the first week of March 2025. With a little gain in some stocks, say 10%, he would exit immediately small profitable positions, as he had tasted a deep drawdown earlier—while more uptrend is yet to come. And he ends up holding other stocks that have fallen substantially, say down 30%, hoping they will recover. (Disposition Effect – selling winning investments too early and holding on to losers too long.)

I would leave you with a few actionable tips to help you invest with minimal bias:

• Master Your Mindset Before the Market. It is difficult to time the market, so stay disciplined with your investments and set your risk-return expectations and don’t get swayed in the market noise. This will help you negate the Herd Mentality.
• Use a data-driven approach rather than relying on gut instinct. Be open to alternative viewpoints and market changes, helping you mitigate Confirmation Bias.
• Give utmost importance to asset allocation and follow it strategically. Diversified investments will keep your portfolio safeguarded. Don’t become too opportunistic to unusually overweight your equity exposure, especially to small caps, ignoring the empirical wisdom. This will help you face the Overconfidence bias.
• Always consider the valuation aspect. Trend is your friend only until it reverses. Don’t blindly follow momentum. Stocks’ future upmove is dependent on the future outlook of the business, not the past performance of the stock. Ponder on it to avoid Anchoring bias.
• Know why you're holding a stock. Write down your investment thesis and maintain a journal of your trades to compare past and present decision-making. Stay strong when the market turns against you, but also be brutal enough to book losses if your assumptions prove wrong. Don’t marry your stocks and keep yourself insulated from Loss Aversion bias.
• Above all, do your homework well. Keep in mind the risk-reward ratio and learn from your mistakes. Deep analysis of the business is your best defence against all emotion-driven decisions, including Recency Bias and Disposition Effect.

(The author of the article is Jimeet Modi, Founder & CEO, SAMCO Group)