Tribal Bias

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I visited India last year. In ten days, I traveled in several cities – New Delhi, Bangalore, Mumbai. I was amazed by the country’s incredible culture: wherever I was, people are happy and welcoming. But I was troubled by the underdevelopment and I started to wonder: where is the “next global powerhouse” that we have been talking about? Especially in the U.S., people have been talking for 30 years about India as the “next global powerhouse.” But even in Mumbai, the nation’s wealthiest city, the deprived living standards were shocking.

I like India so I visited it. I read about the great nation and I enjoy hearing people talking about India. Much of my previous knowledge of India came from Western media, so I thought I know the country well: India is the world’s largest democracy and (so) its society and its economy are both well managed and the country is on its way to becoming the next global superpower. However, watching the local impoverishment was surprisingly shocking – the actual on the ground situation was not communicated to me before. After my Indian trip, I embarked on an intellectual journey. I tried to understand and reconcile what I was told in the U.S. with what I actually saw in India. Gradually, I came to the realization – it is tribal bias.

The bias is difficult to voice. “The world’s largest democracy.” This is how India is introduced in the Western context. Naturally, it becomes quite emotionally satisfying to talk about the great success of “the world’s largest democracy.” Recall the last time you hear the news headline “India is the fastest growing economy” versus “India is slowing down.” And try replacing the word India with a dictatorship country, like “Sudan”, and read the two headlines again. Feel the feelings – you get it. Tribal ideology triumphs and fact matters no more. Whether such success has happened or will happen becomes less important. Especially in the U.S., in spite of realities, American investors generally “want” to believe democratic economies would outperform others.

In investing, because of tribal biases investors are doing themselves and their clients a great disservice. Investment decisions are no longer based on solid facts but flimsy ideological preferences. For example, India has one of the world’s youngest populations with a median age of 28. As such, Western investors are excited about India’s upcoming population dividends, considering the country at an advantageous position for economic growth. But careful investors should do their homework: India sees a net increase of 12 million people joining its labor force every year – that is 1 million a month. However, automation is taking away jobs at call centers, IT outsourcing firms and manufacturing plants. Service sectors alone do not usually generate high-paying job opportunities in large numbers. Anti-globalization movements only make things worse. In the best of all times, India only managed to generate less than half of the needed jobs. What would happen if a ripening generation not having enough jobs? Aside from above mentioned joblessness condition, investors choose to turn a blind eye to many other facts. Just to name a few: court efficiency (27 million pending cases backlog in India, as of 2016), climate change (2017 monsoon flooding unfortunately killed 700 people), lack of skilled workforce (fewer than 5% of India’s 487 million workers received any formal training, as of 2015), growing government deficit and high USD borrowing costs. Facts are filtered to fit our preferences, silently.

Tribal bias hurts investors and it also hurts the target country. During my Indian trip, corporate executives often mentioned about outsiders’ high expectation on India: “they demand first world behavior from us but we are running on third world infrastructure.” High expectation also inflates India’s financial markets. For much of the last 15 years and measured by Price-Earnings (P/E) ratio, SENSEX Index almost always swelled faster and further than the rest of the world. From the beginning of 2016 to now, SENSEX rose more than 30%. During the same period, India’s GDP growth has been slowing down from 9.2% YoY to 5.7% YoY. Today, the Indian equity market is among the most expensive ones in the world, trading at 23x P/E, surpassing the already inflated S&P 500 Index by 10%. In addition, as local retail investors tend to buy at the peak when foreign investors are selling, financial markets movement actually deprives local populations by taking away their hard-earned wealth.

Tribal bias is self-inflicted. It can happen for any investors as long as we are not careful about what is behind our thinking process – is our thinking process driven by economic reality or tribal ideology preference? I’m writing here because I like India and I am very concerned about the tribal bias that permeates the Western investment community that does no good to either India or investors themselves. Tomorrow, when you open newspaper, turn on TV, people will talk about India being the next global powerhouse again. Before they write and speak, have the editors and news anchors ever visited India? And how about you? So many has been so wrong for the last 30 years – I urge you to pause and reflect why.

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