AXA’s investment insights

Behavioural investing
The pack mentality

The share market It is not made up of automatons making Overconfidence

is characterised coldly logical pre-programmed decisions. Trading too much or taking too much risk in
as having a It is comprised of investors – individual and one area
collective – who often react emotionally and
personality Loss aversion or fear of regret
sometimes irrationally to good and bad news.
of its own for Called behavioural investing, it is especially Not taking action when necessary to buy or
good reason. important to be aware of it during periods of sell shares
market turbulence.
Mental accounting
Hunting in packs Holding an emotional attachment to individual
Many investors tend to ‘hunt in packs’, making investments
investment decisions based on what the
Anchoring
‘herd’ is doing. The media tends to perpetuate
this herd-like investing – printing sensational Placing too much credence in recent price
headlines that often exaggerate the reality of movements and not enough in a share’s long-
current market conditions. term history
On a bad day, shares can be ‘savaged’ or Procrastination
‘mauled’ by an unforgiving share market,
Not acting in their best interests due to inertia,
while on a good day, they can be ‘rewarded’
investors can end up constantly worrying
or ‘boosted’.
about selling ‘winners’ too soon and getting rid
Such headlines can often lead to of ‘losers’ too late
‘bandwagon jumping’ where investors react
in panic by buying or selling particular Herd mentality
shares. Blinded by this panic, rational Over-reacting to every piece of bad and good
consideration is not given to the true news, investors can become too optimistic
underlying value of these shares, or the when the market rises and too pessimistic
strength of the company behind the shares. when the market falls.
It is important to remember that through
behavioural investing, investors run the risk of Dotcom crash
potentially buying shares that are over valued, What happens when the bubble bursts
or selling fundamentally sound under-valued The ‘dotcom crash’ is a prime example of
shares which have reached the bottom of the how the irrationality of investors can create
cycle and have a favourable earnings outlook. an artificial bubble, leading to an inevitable
Investors are prone to a wide range of – and painful – correction. In the late
emotional or psychological impulses, including: 1990s, investors scrambled to buy shares
in technology companies as excitement grew
surrounding the potential of the Internet.
 As investors became entranced by the Both the original spike in share prices and
possibilities of online commerce, they signed the eventual crash were out of proportion.
up for every start-up ‘dotcom’ venture that They were driven by investor sentiment and
tried its hand at an initial public offering the herd mentality, which artificially boosted
without properly and objectively analysing the the value of many shares way out of line
company’s fundamental revenue streams and with the modest earnings prospects of the
business plan. dotcom companies.
They forgot to ask the basic question – how But even the dotcom crash had a happy
will the company make money? ending for long-term investors who resisted
Many of these technology shares were listed the temptation to realise their losses at the
on the NASDAQ exchange, which enjoyed a bottom of the cycle, with the NASDAQ index
phenomenal rise, improving more than fivefold subsequently climbing gradually and more
in the space of five years. sustainably to its current level of around 2500.

But around the turn of the millennium, reality Discipline is key

slowly began to dawn as more and more
A disciplined approach to investing is the
dotcom companies started to file disappointing
key to avoiding the potential pitfalls of a
returns and future earnings projections.
behavioural approach. By using rational
A sharp correction was inevitable. The thought rather than emotion, and by ensuring
index lost nearly 9 per cent in three days, your portfolio is well diversified over the long
precipitating a slow, steady decline which saw term, you are more likely to see your financial
the NASDAQ bottom out at just over 1000 in goals achieved.
late 2002 – just over a fifth of its peak only
two years earlier.

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