THE IRRATIONAL BEHAVIOR OF PEOPLE IN THE STOCK MARKET
It is ironical that intelligent, well educated people succeed in the real world but behave very irrationally in the stock market. These are some of my observations of their mad behavior.
- In Supermarket We Rush to buy more when there is a sale or price crash. But when there is a Sale in the Stock Market Crash we are afraid to buy – but shun those bargain stocks instead.
See: 1 Kg Anlene Milk Powder sells for Rm36 a bag. Now there is an offer at Rm29.00. Almost 20% discount? We load up more. And if Anlene crashed to Rm19.90 (45% off) WOW! Time to buy even more!
Now take a look at Stock “X”. Price crashed Rm20%? Time to buy some? And price crashed by 45%? Oh No! In fear we didn’t buy more but sell out in a time of panic! If you have done your homework well and are sure that the Stock you picked is sound and solid, why panic? Just buy more!
2. In Real Life When We Buy A Car We Will Test Drive It. Check out its engine, its interior and the ride. Same goes for the house or anything that we fancy. We examine them personally & carefully before making a purchase.
In the Stock Market man behaves irrationally. Just at the mention of a hot tip we plonk thousands, even tens of thousands of dollars into a “hot stock” without bothering to check out the nature of the company ourselves.
3. In Real Life We Learn Maths/Science from our teachers. We learn driving from Driving Instructors. We learn swimming or diving from Swimming Coaches. You see, we seek out experts in their field and learn from them. Sometimes paying high fees to acquire skill and real knowledge.
In the Stock Market? They say the Stock Exchange is the only place in the world where tycoons who arrive in Rolls Royce listen to stock tips from shoe shine boys or those who came to work by the subway. This foolish behavior is daily found in the stock market and also among many in Investlah Forum & also in i3 Investors Forum
4. When we buy a house we don’t pick up the phone and check with the Real Estate agent about the status of the house price morning , afternoon and evening. Do we? However, when people buy the share of a company he phone his stock broker all the time – morning, afternoon and at night. This irrational behavior is compulsive and real. Think if someone checking about his house price all the time? No. He buys a house and let that be a long term investment. No so for the irrational guy in the Stock Market. He is irrational and itchy in behavior and cannot sit still.
5. In real life we know that we can easily run on flat ground, we can still jog up hill slope (though harder now) and we have to crawl up near mountain summit at the very top. Running on flat land is quite effortless. We all like that. Climbing up hill slope? Ok once a while. Crawling on our knees on all four near mountain peak? That’s strenuous exercise. Few really want to do that.
Now look at a growth value stock like Oka when it was 35 cts or Ajiya when it was Rm1.00. They grew pretty well year after year by 20% to 30%. So can buy? Now look at Blue Chip like Nestle or Dutch Lady at their lofty peaks – squeezing out a growth of only 3% to 4%. When buy blue chips at their loftiest peak with little room for further growth?
Why avoid buying Value Growth Stock? This is not rational at all.
6. In The Real World We Buy Stuff When They Are Priced Sensibly. Like buying a cheap P. Axia at Rm25,000?
Now if the car price increases by Rm1,000? So P. Axia now Rm26,000. Can buy? Yes, why not ? Rm1,000 increase only. Now see if P. Axia price going up by a whopping 200%? P. Axia at Rm75,000? Immediately sales crashed to near zero. At Rm75,000 THERE ARE MUCH BETTER BUYS OUT THERE! P. Exora at Rm65,000 or P. Alza at only Rm55,000. Both are much better cars than P. Axia. So why still go buying any more P. Axia.
Let us apply this to stocks. Latitude, Li Hen, VS, Airasia, Triple C and many other high flying hot hot stocks – ALREADY UP BY 200% to 300%. Why experts still come out to tell people to chase after them? ISN’T THIS IRRATIONAL MADNESS?
Only thing is.
In The Real World We SEE through Correct & Rational Perspective. In the Stock Market We are Irrationally Carried Away By Our Greed with Distorted Vision.
7. Every Thinking Man or Woman knows that gambling in the casino is a losing proposition – so they avoid gambling.
36 numbers for you to choose. If you are lucky and strike – the pay out is 1 = 30. Want to be 100% sure you will strike? Then just buy all – no 1, no 2 all the way to no 36. Sure win mah?
So you buy 36 numbers at Rm1 each. The pay out is Rm30 for the number you are spot on. So what? you have just lost Rm6 in the first round. That’s a lost of 16% of your capital!! Repeat that 16% loss in the 2nd, 3rd round and more?
You are guaranteed to lose. So you avoid gambling? Good. You can think rationally.
Now apply this to the Stock Market. You think you can win by contra or short term punting? The law of statistics are stacked against you. Every time you buy or sell you are also paying a fee like the 16% in a casino. After the trading fees are much lower than the casino. So what? Since you are addicted to Bursa and the Stock Market you will still pay by more frequent dabbling in shares. SEE – that’s how 80% of the people will finally end up losing money in the Stock Market. Why then are so many so IRRATIONAL? Aha! Many will end up as poor as a RAT! Are you one?
To be continued…
By Calvin Tan Research
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