Break the Trap of Recency Bias: Embrace Quality Investing Now
Introduction
Think about a cricket team having a few bad matches; everyone starts doubting them, forgetting all the years they played brilliantly. Investors tend to behave similarly. When a factor dips briefly, the recent fall feels bigger and scarier than everything that it has delivered over the long term.
This is known as recency bias, and because of it, currently, investors tend to ignore high-quality stocks exactly when they should be paying attention to them. This blog will help investors understand what recency bias is and why staying rooted to fundamentals is essential for long-term wealth creation.
What Is Recency Bias in Investing?
Recency bias is a common behavioural bias where investors give more weight to recent events and ignore long-term historical data and fundamentals. Recent volatility, short-term returns, or new headlines feel louder and more convincing than years of consistent performance.
Psychology explains why:
- The brain prioritises vivid, recent, and emotionally charged information.
- Usually, short-term price movement triggers fear or excitement far stronger than long-term facts.
- Investors assume recent performance will repeat, even if it contradicts fundamentals.
Considering all this, the result is that investors tend to chase what is working now and ignore long-term fundamentals.
How Recency Bias Makes Investors Miss Investing in Quality
1. Short-Term Dips Appear Bigger Than They Really Are
Every high-quality company goes through phases where stock prices are either stagnant or corrected. But recency bias makes these normal fluctuations look like a major warning sign. Investors hesitate, even though nothing has changed in the fundamentals. This is the most common cost of recency bias.
Example: Rohan saw his favourite quality stock fall for a few weeks and stopped investing in that high-quality stock. Later, the stock had recovered over the next few months, and Rohan ended up repurchasing it at a higher price.
2. Recent News Hides Years of Strong Fundamentals
Headlines and short-term noise often overshadow what truly matters:
- Consistent profitability
- Strong balance sheets,
- Prudent capital allocation,
- Strong governance,
- Stable earnings growth.
- Lower Leverage
- High dividend payout
Recency bias shifts its attention from fundamentals to recent reactions.
Example: Meera read a negative article about a temporary sector slowdown and avoided a company she had trusted for years, which had strong fundamentals. After a few months, the slowdown reversed, the company posted strong results, and the stock rallied, but Meera missed the entry due to that one negative article.
3. Investors Start Chasing What’s Trending Instead
A stock that has rallied recently “feels” more attractive, even if it is overpriced, than one that is temporarily flat and underpriced. This makes investors overpay for short-term winners while ignoring high-quality companies available at good valuations.
Example: Arjun sold a fundamentally strong company and bought a “hot trending” stock that everyone was talking about online, but later the trending stock lost momentum, corrected sharply, and Arjun realised he had left a stable compounder for a short-lived trend.
4. Long-Term Resilience Gets Overlooked
Quality investing shows its strength across cycles:
- Lower drawdowns in volatile and choppy markets,
- Faster recoveries,
- Smoother compounding over time.
But recency bias hides these long-term advantages because investors focus only on what happened recently, not on how the business performs through cycles.
Example: Kavya exited a quality fund after a dull quarter, thinking it had “lost steam”. And later, the fund bounced back, outperformed the market for the next few years, and she re-entered much later at higher NAVs.
Historical Evidence: Why Quality Shines Over Longer Horizons
Recency bias often makes quality investing appear “unimpressive” in the short term. But historical market patterns consistently show that quality-oriented portfolios tend to deliver smoother returns and better downside protection over longer durations.
| Calendar Year | NJ Traditional Value | NJ Quality+ | NJ Momentum | NJ Low Volatility | NIFTY 500 TRI |
| 2016 | 16.88 | 7.46 | 0.22 | 10.53 | 4.68 |
| 2017 | 48.22 | 42.24 | 69.43 | 36.43 | 37.65 |
| 2018 | -19.97 | -2.32 | -7.92 | 0.27 | -1.55 |
| 2019 | -13.33 | 2.92 | 9.16 | 2.17 | 8.64 |
| 2020 | 14.80 | 24.85 | 37.75 | 17.84 | 17.70 |
| 2021 | 53.67 | 49.62 | 55.99 | 31.65 | 30.95 |
| 2022 | 10.70 | 4.51 | 6.75 | 3.60 | 4.25 |
| 2023 | 56.57 | 56.67 | 47.78 | 38.59 | 26.91 |
| 2024 | 27.20 | 28.18 | 32.17 | 21.47 | 16.00 |
| 2025 YTD | 4.11 | -1.71 | -3.00 | 6.53 | 6.46 |
| Outperformance Count | 6/10 | 7/10 | 7/10 | 7/10 | - |
Source: Internal Research and NJ AMC's Proprietary SmartBeta Research Platform. For 2025 YTD, Data is till 31st October, 2025. NJ Traditional Value Model, NJ Enhanced Value Model, NJ Quality+ Model, NJ Momentum+ Model, NJ Low Volatility+ Model and NJ Multi-Factor+ Model are proprietary methodologies developed by NJ Asset Management Private Limited. The methodologies will keep evolving with new insight based on the ongoing research and will be updated accordingly from time to time. Past performance may or may not be sustained in future and is not an indication of future return.
Source: Internal research, Bloomberg, CMIE, National Stock Exchange. Calculations are for the period 30th September 2006 to 31st October 2025. NJ Traditional Value Model, NJ Enhanced Value Model, NJ Quality+ Model, NJ Momentum+ Model, and NJ Low Volatility+ Model are proprietary methodologies developed by NJ Asset Management Private Limited. The methodologies will keep evolving with new insight based on the ongoing research and will be updated accordingly from time to time. Past performance may or may not be sustained in future and is not an indication of future return.
A look at the recent performance of the quality factor shows that the quality factor faced headwinds, which can trigger recency bias in investors. But still, even after the headwinds, NJ Quality+ Model (20.21% CAGR) has outperformed Nifty 500 TRI (14.90% CAGR) in 7 out of 10 calendar years, which is similar to or more than any other factor. If investors only look at the recent performance, they might be lured away by the quality factor and invest in other factors.
But looking at the longer picture, quality has been one of the best and consistent performer. Quality rarely explodes; it simply persists. It doesn’t win every phase of the cycle; it wins across cycles. For the period from September 30, 2006, to October 31, 2025 quality CAGR of 19.24% significantly outperforming the overall benchmark, the Nifty 500 TRI, which posted a CAGR of 12.73% over the same period.
If a slow or muted patch is making investors wonder whether to return to quality, that’s recency bias talking because the real mistake was actually stepping aside when it looked boring.
Conclusion
Recency bias may feel harmless, but it causes investors to stay away from strong, reliable companies simply because recent performance looks dull. By shifting focus from short-term movements to long-term fundamentals, investors can stay aligned with the patterns that truly matter and avoid missing opportunities hidden behind short-lived trends.
The key is to focus on fundamentals, stay consistent, and have long-term investing discipline. Explore NJ Mutual Fund’s 100% rule-based investment approach designed to help you stay bias-free, consistent, and quality-driven through every market phase.
FAQs
1) Why does recency bias influence investment decisions?
Because recent events feel more vivid and emotionally convincing than older data.
2) Are high-quality stocks always consistent?
Not in the short term. Their real strength appears over longer horizons and market cycles.
3) How can investors avoid recency bias?
Recency bias can be avoided by looking at multi-year performance, following rule-based strategies, and avoiding emotional decisions driven by short-term headlines or movements.
Investors are requested to take advice from their financial/ tax advisor before making an investment decision.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
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