Once upon a time, there was an investor named Ramesh, who was always looking for new and innovative ways to grow his portfolio. “Have to move with the times” was his common answer.
One day, he heard about a new investment product which claimed to offer superior returns with minimal risk. The product was a structured note, which combined elements of stocks and bonds to offer a complex financial product. Ramesh was intrigued by its complexity and promise of returns, and invested a significant portion of his portfolio in it.
As time went on, and he realised that the product wasn’t performing as well as some of his older stocks which he had purchased. On deeper review, he realised that the complex structure, combined with hidden fees and risks, were contributing to its underperformance.
This story sounds familiar, doesn’t it? We all know at least one Ramesh in our lives.
This story sounds familiar, doesn’t it? We all know at least one Ramesh in our liveComplexity bias is exactly this – an investor favours a complex product he / she doesn’t fully understand, as compared to simple ones, thinking that the complex one will deliver superior returns. In reality, they rarely do.s.
Take the example of Suzlon Energy as a company – a wind turbine manufacturer and renewable energy company, with multiple complex business models, which involved a number of subsidiaries and joint ventures. The company struggled with very high debt levels, operational inefficiencies and a tough regulatory environment, leading to a stock which was once trading as high as ₹390 in 2008, currently trading at ₹8.00. Better incumbents have captured the wind energy market in the subsequent years but Suzlon hasn’t recovered from the slump, despite multiple strategic investments over the years.
Hence, to avoid complexity bias in the stock market, it is important for investors to focus on fundamentals and conduct their own research. By prioritizing simplicity, investors can make better-informed decisions and achieve better long-term results.