Date: August 3, 2020
First published in Straits Times on 2 August 2020
Even with more information available today, people still make same mistakes
There is a saying which goes: The more things change, the more they stay the same.
There is a great deal of truth in this, particularly when comparing investing in the 1990s versus investing today.
Individuals may have access to a far broader range of markets and products now, and with the advent of the Internet, information is so much more freely available today.
Yet, even if the average investor today appears to be so much more sophisticated than his 1990s counterpart, is the approach to investing any different?
Maybe not, in terms of the mindset.
FINANCIAL TIPS
Twenty years ago, investors that the Securities Investors Association Singapore (Sias) dealt with were relatively uninformed about what they were buying because they did not have access to research on the Internet back then.
They were, therefore, more likely to take short-term punts on stocks with no fundamentals, while relying entirely on their remisiers for guidance, or, if you prefer, “tips”.
CONTRA TRADING
The short-term punting mentality was encouraged by “contra trading”, which is a system unique to Singapore and Malaysia.
Contra has its roots in the market’s settlement period in the 1990s – the term “t+five” means that sellers of shares had five market days after the trading day (or “t”) to deliver the shares and buyers also had five market days to pay for their purchases.
If investors bought stocks and sold them during those five days, they did not have to fork out the initial payment. Instead, they would receive a cheque for the “contra profit” if the stock price had risen during that period.
Of course, they would have to pay for the loss if the price had fallen. In exchange for this privilege, investors paid a commission of 1 per cent for each trade.
It provided unlimited leverage – it made some punters rich very quickly and some poorer just as quickly. Fortunately, contra trading is officially no longer available today.
RESEARCH WAS HARD TO COME BY
The reliance on tips 20 years ago was also because stockbroking research was not widely available – firms would distribute their “buy” and “sell” recommendations to their most-valued clients first. Ordinary retail investors would probably obtain copies of these reports only a week or two later, by which time the usefulness of the reports would have been severely diluted.
Today, most individual players have online accounts, all sorts of financial apps on their smartphones and access to loads of research from dozens of websites.
For example, today’s investors know at their fingertips what is expected at upcoming key events, like the United States Federal Reserve’s Open Market Committee meetings and how the market is likely to react.
It is, therefore, possible to say that the level of sophistication has risen considerably and that the average retail investor is better informed than his counterpart in the 1990s. But is there any real difference in investing attitudes?
One reason to doubt that there has been any substantive change is that the short-term, punting mentality which was prevalent in the 1990s is widely encouraged today by rock-bottom commissions being offered and the much wider range of markets and instruments that is now open to everyone.
APPS FOR EVERYTHING – INCLUDING CRYPTOCURRENCIES
Many popular apps encourage their users to trade in highly speculative “investments”, like bitcoin and other cryptocurrencies, instruments that are lacking in any fundamental backing but can exhibit large volatility.
This appeals particularly to millennials, younger investors under the age of 40 who might accept these forms of non-traditional currencies as legitimate modes of payment and might feel confident in their ability to trade such instruments.
Many apps also offer trading in leveraged securities such as Contracts for Differences, or CFDs, that can deliver large gains, but, by the same token, can result in big losses too. In addition, these products including FX (foreign exchange) trading are already leveraged, which means losses will be widened.
Recently, Sias was informed that some FX traders have entered into a trading strategy, called the Martingale strategy. This strategy is about doubling your trade size when you lose. The theory is that when you do win, you will regain what you have lost. One setback of this strategy is that you are always doubling your exposure, against the market trend.
One must understand what the trading strategy does, and not follow other traders blindly because this can only lead to losses.
Overall, what is on offer is big short-term profit for the active day trader keen to pit his wits against the market. But is this wise?
ENTER COVID-19 AND THE AUSTRALIAN EXPERIENCE
Covid-19 has resulted in a big impact. Many mobile day-trading apps have seen a large spike in demand for their services since countries began locking down their economies.
This is perhaps not surprising because with everyone staying at home and with more time on their hands, people will try their luck making money in the market.
This can lead to problems because of the inability of individuals to correctly get the timing right when entering and exiting markets.
Over in Australia, the regulators, the Australian Securities and Investments Commission (Asic), released in May a report showing that short-term day trading had spiked during the country’s lockdown, adding that most punters would have lost money.
“Asic analysis of markets during the Covid-19 period has revealed a substantial increase in retail activity across the securities market, as well as greater exposure to risk. We found that some retail investors are engaging in short-term trading strategies unsuccessfully attempting to time price trends,” it said.
“Trading frequency has increased rapidly, as has the number of different securities traded per day, and the duration for holding the securities has significantly decreased: indicating a concerning increase in short-term and ‘day-trading’ activity.
“Even market professionals find it hard to ‘time’ the market in a turbulent environment, and the risk of significant losses is a regular challenge. For retail investors to attempt the same is particularly dangerous, and likely to lead to heavy losses – losses that could not happen at a worse time for many families.”
Asic’s analysis found that in the focus period, on more than two thirds of the days where the average punters were net buyers, prices declined the following day.
The inverse also happened – on more than half the days where retail investors were net sellers, their share prices “more likely” increased the next day.
THE MORE THINGS CHANGE…
It was because retail investors were often aiming for short-term speculative profits in the 1990s and getting burnt frequently that Sias was prompted to start offering free educational seminars and workshops, as well as to start its in-house research unit.
It is obvious that these services are still very much needed. This decade, investor profile and access to information may have changed, but the underlying motivations and approach towards investing have not. The more things change, the more they stay the same.
• The writer is David Gerald, founder, president and chief executive of the Securities Investors Association Singapore.
