SPILLED MILK
"Can you tell me which stocks to buy?"
Jumping in the deep end before you can swim investment questions aren't a new thing. People have always contacted us to ask questions that only prompt more questions. Ones they haven't considered. It's only natural that if your job involves money, someone will inevitably ask you about their stock or want a financial forecast. More and more, these questions have gravitated to the internet. A little anonymity means you don't have to feel embarrassed to ask a straightforward question.
The more seasoned investors would always snigger, but we all have to start learning somewhere. Over the past year, these questions have become almost a staple around social media and investment forums. No longer are they as straightforward and innocent as they have been in the past. They've become a little more ridiculous.
"Just bought this company, heard good things. Can anyone tell me more about it?"
"Looking for an ETF, which one should I buy?"
"Looking for a safe stock to put my house deposit in for a couple of years, any suggestions?"
As strange and alarming as these sound, variants of these types of questions pop up across social media and investment forums. People are becoming more comfortable about being cavalier with their money.
Why?
At their half-year results in February, Commonwealth Bank reported 230,000 new broking or pocket app accounts were opened in the second half of 2020. If you were to add in signups across other broking platforms, it's no stretch to roughly estimate that more than 1% of Australia's population decided to start investing, trading or gambling on financial markets for the first time during the second half of 2020.
Closer to home, platforms such as Sharesies recorded a 227% user growth, and we have seen a surge in retail investors buying and selling Fisher & Paykel, Ryman Healthcare, Air New Zealand & A2 Milk shares. The COVID-induced volatility in the market created a speculation bubble. New apps and trading platforms that have arrived on the scene have been termed democratising financial markets over the past few years. They are low cost (some even free), and they are targeted at younger investors.
When the extent of your investment experience is minimum 30% returns from the moment you tuned into financial markets sometime in 2020, then you may have developed some unrealistic expectations. Worse, there have been some outsized rewards for ignorance.
A2 Milk was the second-biggest stock that had record growth due to the demand for its products in China. But a year later, the company is facing a possibility of a 75% profit slump, a four-year low as one of its key sales channels to China dried up due to the Covid-19 pandemic. The A2 Milk share price is now down 72%, having peaked last July at $21.51 and languishes currently at $6.00.
So, in a nutshell, a retail investor could be lucky and enjoy day trading for a while, and there's nothing wrong with being a Lotto winner. But it's important to make the distinction between luck, skill and the prospect of future returns.
Back to the 'why' question. Most day-traders and retail investors are often searching for confirmation to take action or someone to pat them on the back and reassure them it's a good decision. They aren't looking for contradictory information that might drain the blood from their face. As the lyric goes, "a man hears what he wants to hear and disregards the rest".
While stock message boards offer the opportunity to pursue and consider varied opinions, investors with particularly strong opinions tend to seek information that confirms their existing beliefs.
This is quite a strong representation of confirmation bias, one of the big behavioural pitfalls in life and investors. We would prefer not to hear information that doesn't align with our pre-existing beliefs, and we deliberately seek out information that confirms what we already believe. It's a comfortable but lazy state of affairs.
For investors, particularly new ones, a bucket of cold water upfront should be preferable to be dunked in the arctic when hopes and dreams fall apart. No one ever invests with the expectation they will lose, but for inexperienced investors dabbling in individual stocks, that should be expected. A search for all conflicting information should be the mindset.
In our experience, we find that people are more sceptical after they've been punished. They or a family member did something crazy once, which results in an "I don't trust the stock market" mentality. This means accepting some hard truths about their prior gambling exploits and learning about the difference between speculating and investing.
If an investor is concentrating in sectors or stocks due to beliefs or hunches about the next big thing, they don't have the luxury of including negative information. It is positive that the past year has seen an increased interest in investing. It would be a shame if poor outcomes, due to the lack of financial advice and diversification, leading to discouragement and a distrust of markets.
Investors will likely be well served in the long run by working with a trusted adviser who adheres to an evidence-based approach with discipline and diversity rather than speculation and narrative.
This article is prepared in association with Mancell Financial Group, Australia. The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
