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Friday, 6 August 2010

Shopping vs Investing, behaviour peculiarity


Whenever there is some genuine sale giving 'huge' discounts, e.g. 50%, 70% off original price. There'll always be enthusiastic crowds grabbing the items as if things are going for free. I recently encountered one for branded handbags near my working area. Most shoppers are predominantly ladies who seems to have a mental database of each item and their prices. They knew their 'true' worth and face no problem telling which are the real bargains. Thus seldom do I see them regret their purchases.

Stock market sale

While Great Singapore, Christmas sale happens regularly once a year and some sales never seem to end (e.g. Courts), sales in the stock market occur much more unpredictable and sporadic. In contrast to sales in Orchard Road that drew crowds, sales in the stock market scare away people. The greater the discount, the thinner the trading volume.


When energy prices goes up, people complain of higher transport cost, higher utility bills, higher food prices. No one is happy. But when the stock prices shoot up, the trading volume increases. The crowd are happy. The higher they go, the happier they are to snap one the shares like hot cakes.


On the surface, it seems like people have 2 brains, one for daily use, the other for stock market. The latter is obviously faulty. However, drilling a little deeper, I can think of 2 reasons for the apparent difference. First, perhaps, have got to do with valuation. While it is quite easy to know the 'true worth' of an IPHONE 4 or a LV bag, it is not so easy to put a value on a particular stock. And when the price of that stock one had been painstakingly research drops like a rock, the further it goes down, the more the person doubt his analysis. Second, greed. It might seems easy money to buy and sell something that continue to worth more with each passing second. Doesn't matter if one is buying high to sell higher, so long as there's a ready idiot to buy from them. While the problem of valuation could be mitigated by diversification and margin of safety, the problem of greed can only be solved when one become the last idiot to buy at the highest price.



Blogger Royston said...

I'm thinking another reason could be technical analysis. Cos a rising trend will give a signal for more people to jump in.

The so called irrational behaviour is actually rationalised by technical analysis.

7 August 2010 at 10:00  
Blogger Market Uncle said...

Can't this technical analysis applies to real world and stock market while as well? Why don't rising prices in LV bags signal more people to grab more and sell at a higher price later?

8 August 2010 at 22:03  
Blogger Royston said...

I think one of the key issue has to do with supply. If there's a limited supply and the prices go up, people will buy more in anticipation of higher prices later on.

But for alot of the things that supply is not so limited, drop in prices will result in "rational" behaviour, ie. people will buy more.

For the stock market, you can see the suppply as limited as well. Hence a price rise causes a "panic" buy, where people are afraid they will miss the boat and prices will keep going up.

9 August 2010 at 15:10  
Blogger Market Uncle said...

The actual supply actually is dependent more on perception and reality. You pointed out yet another pecularity. When a 'real' sale ended. People merely stop buying. But when the price of a share shoot up, more people jump in to buy in fear of missing the boat (not missing a sale?) ... but only to regret doing so when the price saw a correction later. Bags or other branded goods depreciate upon purchase. But shares don't, so long as the business can continue as a going concern.

14 August 2010 at 16:09  

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