Sunday, 31 July 2011

The Impulsive buyer

Everyone i believe had ever read a book that was bought from the nearest friendly book store. We will always be excited about our new book, eager to find out the content inside. Some will always read the description at the back of the book, while some i call it 'the impulsive buyer'; do not know what they are buying into.

In our financial world, it is also the same scenario. An investor will always be out fishing for investment vehicles and instruments. Informative and intellectual individual will do their own research, while less informative individual will depend on others for expertise. In today's world, there is a third category of people emerging fast into the financial space; 'the impulsive buyer'. Similar with the scenario we quoted earlier, this group of investor do not really know what they are buying in after all.

Everyone will dream of buying their first dream car, the first grand house, having the best wedding, traveling around the world, and of course to build wealth and be rich one day. Of course, it is everyone dream to be rich. There are many ways of making wealth, either you find yourself climbing the corporate world, or setting up a business empire, or the easiest way is to be invested into an instrument that will yield constant profit annually. If you take a look at different methods of building your wealth, there is a similar ingredient or factor that is embedded inside; that is risk.

Let's take a step back to history and revisit the great stock market crash in 1929, the stock market bubble that causes the US stock market crash. It was fueled by a time of peace and prosperity, build on by the growing industries, most of the people has a job. When the credit is available, and market is soaring to new high, everyone realised that stock market is a good place to make their wealth. As credit was available in for the form of margin for investors, people started flocking to the stock exchange to participate in the soaring market. Money was easy to make. It was a time where dream can be realised. The main problem here is that information available about the investment they are making were not comprehensive and available. People do not really gain access to a number of information that are vital to their judgement. Risk component were not explained carefully to this group of 'the impulsive buyer'. The focus on the goal of money making had virtually made the stock exchange a 'casino'. Even casino as we known constitute a very high risk involved.

In the earlier article about bubble, we explained that bubble are created primarily indirectly from human behaviour. The insanity in us drives the market one last time to its peak, and when the momentum fails, the consequences must be endured. Market crashes down, and marks the start of a new trend, which is down. Wealth were lost, dreams were trashed. Everyone faces the same consequences. The group that will take the hardest blow will always be the group with impulse. They bought their stocks without much consideration, without research on the companies they invested in, or understanding the dynamics of how the stock market and the economy function together. The most important factor they disregarded is risk.

Impulse action normally happen without thoughts. Many of the investors today are more intellectual. Information technologies are much better than old times. In addition, there are many more factors that will affect our economy, and of course the stock markets. There are also invention and creation of more sophisticated instrument that not all experts understand them. The only factors that will always remain the same is risk involved and sentiment bias. Impulse buying into something normally start off by not thinking through the whole dynamics and fundamental factors of the investment action. Puring thinking that overall market will grow, and the fact that news and articles that influence the decision of the investor, generally will cost risk to be ignored partially. Why partially? The other part which show the factor was part of the consideration is due to the thinking process of lower risk selective process. However, risk is not totally eliminated if investment process is not think through from a macro to a micro perspective. In today's world, stock markets and other investment from different economies are inter-dependence of each others. With majorities of investors investing in different part of the world, no doubt and event risk at certain part of the world will affect the rest of the other economies.

Just like buying a book, you do not wish to buy a book with when you realised the content is not as exciting and informative as it was, resulting in wastage of money. Many may think they know all this, but past actions and results have shown that risk were not minimised, resulting huge losses. Companies and individuals are alike. If they do not take the correct prudent approach, both fate will be the same. Like a movie i watched and i like the tag line that was mentioned, "If you ask the scientist why, he will say it is unprecedented".


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