“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 take the lead.

For stock markets, too much fear sinks prices below intrinsic values, while greed most likely sends 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 when 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 were quotes some finance houses in the main financial market could not compete with.

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

What investors in Ghana fail to do is to inquire about the underlying value 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 like.

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 providing, 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 GH¢1 by end of 2018 – which represented about 33.33% increase.

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

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

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 MTNGH up? Was that tangible enough to hold firm to the end of the year? Did this performance give an indication the GH¢1 would easily be met? Well, we had a 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?

Source: GSE

The financial market is all about pursuit of money. Aside from the numerous analyses that are done, greed and fear can be used to investors’ advantage when making decisions in the financial market. So, when you have loads of people rushing to a 10% monthly return investment – in 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 noted, but he had his regrets for 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”.

The writer is a Market Analyst

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January 17, 2019 4:33 pm