Investors Behaving Badly.
Asian investors show more emotion than a bad soap opera or a failed hedge fund manager.
One expects new frontier markets to behave like casinos filled with investors with little or no experience. They are the last to panic in and last to panic out of the market. Some of those investors point to the fact that they are already so wealthy that their intuition must be magically better than everybody else’s.
Asian investors should know better because they have some of the longest experience in cross-border stock exchanges. The first Indian stockmarket began over 180 years ago. Hong Kong has been trading since 1891 and trading in Shanghai began in 1866, with interruptions for regime changes.
With that heritage, investors should come more easily to the wisdom of the price earnings ratio, the capital asset pricing model or the Black Scholes equation. The tactics of the charts have passed them by, whilst a Sharpe ratio must be something to do with the kitchen knife.
Asian investors rely on gut feel for their investment decisions – more commonly diagnosed as indigestion. They become anchored to a figure, a phrase, a concept and obsess after that at the expense of a little contrary analysis.
Ten people on our fund management team once bought gold when it was hot, chasing the theory that old ladies were filling their teeth to secure their savings. After the price sunk, it became obvious that most old ladies would rather invest it in the Macau casinos than store it.
Until 20 or so years ago, the average investor tried to feed from the crumbs that fell from the table of the Fat Cats. The main markets of Hong Kong and Singapore now have world-class regulation that creates a level playing field, and many other countries, including China, are catching up. But old habits die hard and investors would still rather trust a tip than trust an adviser.
When they do they run with the latest idea brought to them by a man in a nice suit and an embossed business card. Or they carefully pick the most obvious investment because it is the primary idea – just before it tanks.
Part of the problem is poor investment advice, often driven by hungry institutions keen to increase market share. They often get the flaky clients that they deserve – who fight back after something goes wrong.
Risk management often means following the crowd, instilling a herd mentality that makes markets boom and bust. Last year’s 50% boom in Shanghai did not happen on any particular fundamentals. Investors chased the market fearing they would miss the boat. Banks lent them the money to do it with barely more credit analysis. “Let’s just do it” was driven by emotion, leading to irrational behaviour.
Everyone talks and gives tips at the Club – and most of the tips are legal as they are unrelated to any inside information. What is strange is that people believe them. Greed overtakes fear.
The failures come from lack of discipline – ignoring simple rules like not putting all your eggs in one basket; sectors, shares or markets. Thinking that you will get out before the next guy, ignoring the wider meaning of the fundamentals and – the big gotcha of recent years – leverage. Why do billionaires continue to make a small fortune from a big one by continuing to make big bets on limited payback instruments using borrowed money – at the top of the market?
Twenty-five years ago, I used to think that the next generation would have more sense as their parents were sending them to Harvard and then Goldman’s. But a little knowledge is a dangerous thing. At the age of 30, they will override a staffer with 30 years of experience. It is not surprising that financial investments are much less regarded than sticking with the original business. There is a deficit of trust in Asia of letting go family generated wealth. I’m still waiting for that generational change from investing by emotion to investing by intellect.
Even Asian fund managers are not immune to fixating on the screens from opening bell or closing numbers. That is not investment that is speculation, even if some of the fund managers can be acceptable speculators. Trading often, jumping in and out of stocks, sectors and countries, shows activity but it’s more professional to put energy into getting just three key decisions right a year
As a result, there are relatively few unemotional investment professionals in the Asian fund management community regardless of their length of experience. But there are some.
Asia is a behavioural economist’s dream – all the mistakes are here. Naturally, you usually only see them when things go wrong. At the Club, you big up your successes, not the lessons from the failures – and that repeats the whole emotional cycle all over again!
My Behavioral Finance presentation and slide show are available on request.