The Greed Factor In Investment Decisions(Article)

“Be fearful when others are greedy and greedy when others are fearful”, Warren Buffet. Investors are normally driven by fear and greed. CNNMoney's fear and greed index was instituted mainly to measure this. Persons who monitor the index are most likely to make some good investment decisions.

According to analysts, greed, like love affects the brain and when it comes to issues related to money, fear and greed takes the lead.

For stock markets, too much fear sink prices below intrinsic values whiles greed most likely send prices over the roof.

Greed, as defined by the Cambridge dictionary is “a very strong wish to continuously get more of something, especially food or money”. There is however no consensus as to how much of desire qualifies as greed.

Investors in the Ghanaian financial market were fond of window shopping for “good” rates. The finance house or bank that offered the “best” rates attracted most customers. It got to a point some investors felt the banks and finance houses were “joking” as their rates were not competitive enough.

This single-handedly had the potential of destroying the entire financial sector.

So there were investments in Ghana that quoted 3% daily on investments as well as 10% monthly. These are quotes some finance houses in the main financial market could not compete with.

Warren Buffet’s number one rule instructs to “Never Invest in Something You Don’t Understand”

What investors in Ghana fail to do is to inquire about the underlying values of such investment assets. Once you enter an investment avenue and you are not able to quote the underlying value, you should know the riskiness of the venture.

There were a lot of withdrawals from the banks and investment houses into such schemes. High numbers sold shares to send to “assured” return investments of 10% a month and the likes.

In the article, the Accra Bourse: The Highs and Lows of 2018 I brought to notice the numerous opportunities to earn more than what such schemes were provided, with just a little attention on activities on the stock market.

MTN Ghana listed on the Ghana Stock Exchange in September 2018 at 75Ghp. At the time of listing many analysts were optimistic the price of the communication giant could easily hit GHC1 by end of 2018 which represented about 33.33%.

In discussions with many short term investors who participated in the Initial Public Offering (IPO) were hoping that the stock hits the price and then sell off completely or a portion.

Just around that period, the banking crises hit the country’s financial sector. This issue amongst others started pulling the stock market down. MTNGH was just about the only stock holding the market above sea level.

Source: GSE

Within a month the price hit 93Ghp representing about 24%. Let’s note that just around that period most listed stocks were trading downwards. What could have been holding MTN? Was that tangible enough to hold firm to the end of the year? Did this performance give an indication the GHC1 would easily be met? Well, we had some few people saying 24% is okay, let me just sell off and some others wanting to hold on till the end of the year despite being aware of the issues on the GSE. Was it a case of greed?

The financial markets are all about the pursuit of money. Aside from the numerous analysis that is done, greed and fear could be used to investors advantage in taking decisions in the financial market. So when you have loads of people rushing to a 10% monthly return investment, which nobody but the managers of the scheme understand the business, that alone should send a signal for a decision to be taken.

Warren Buffet’s rule of “Never Invest in Something You Don’t Understand”, is well noting but he had his regrets of not investing in Google and Amazon as he “…had plenty of ways to ask questions or anything of the sort and educate myself, but I blew it.”

In all, sticking to an investment plan by avoiding dominant market emotions will go a long way to avoid losses. Let’s all “Be fearful when others are greedy and greedy when others are fearful”.