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The Star Online: Business

Why investors make bad choices

Posted: 24 May 2014 04:43 PM PDT

Investments are a very serious matter. As with other important aspects of our lives, proper decision-making is integral when it comes to investing. While not every investment decision we make can be 100% accurate, we do possess the necessary prudence to differentiate what a smart choice is from a less ideal choice.

So, despite having the aforementioned prudence, why do we still make ill-advised choices in terms of investments? There are three factors that affect our choices, as these are closely in line with our behaviour.

Availability bias

According to behavioural scientists, availability bias is a person's tendency to assume that if a certain incident has happened before, then that incident happens to be "available" or can and will happen again in the future.

The problem is that people also have a tendency to exaggerate on the probability that those events deemed available will happen again.

In terms of investments, availability bias works both ways. For one, investors who have enjoyed a measure of success in a particular investment in the past will have a particular prediction to the same type of investment, even if the results strongly advise against further investments.

By the same token, people who have experienced some form of failure in specific investments will tend to exaggerate the frequency with which such instances do occur, thus clouding their decisions.

Loss aversion

Loss aversion is something that affects investors for the simple fact that nobody likes suffering loss of any kind. In fact, it is theorised that the level of impact loss has on a person is greater than the impact of a gain. This means people will not generally mind not gaining anything, as long as they do not suffer any loss.

From an investment point of view, losses tend to come with the territory. However, it is hard to bounce back from loss, even for seasoned investors.

A loss, especially a significant one, naturally affects choices investors will subsequently make; essentially preventing them from taking risks that may possibly yield high returns because the negative feelings—the disappointment, frustration, pain and even, to an extent, humiliation—associated with the loss are all too much to go through again.

While many will argue that a person tends to harden after several losses, behavioural theorists claim that loss aversion operates mostly on a subconscious level. Most of us even avoid loss without even knowing we are doing it.

Probability neglect

Probability neglect revolves around how people tend to become emotional during high-pressure situations or any scenario wherein there is a weighty consequence to every course of action.

Basically, this means that people get emotionally rattled, so much so that the focus will remain on the worst-case scenario of any situation instead of logically analysing probable scenarios and looking at the situation with a level head.

When it comes to investments, a level head can mean the difference between a smart call and a poor choice. Probability neglect prevents an investor from looking at all the available pieces of information regarding a particular investment—seeing, instead, only the pieces of evidence that reinforces the perceived worst-case scenario.

One solid example of this is the investing attitudes in the market after the recession. After the crash, investors were more reserved in their investing, due not just to probability neglect, but to a combination of all three factors specified here. The huge losses a lot of investors suffered have had most of them second guessing all the investment choices they have made.

After all, if they were wrong once, the possibility remains that they can be wrong again. They have suffered losses they do not wish to suffer through again. And, a lot of them have become focused on the potential of another crash that an objective and logical decision becomes harder to make.

This whole scenario shows that investors, despite all their power, resources and savvy, are also subject to the same kinds of pressures everyday Malaysians face. These factors are all normal human behaviour.

The difference between successful investors and failed ones, however, is not just making consistently right choices, but also knowing how to anticipate and appropriately deal with losses as they come.  

This content is created by Nazirah Ashari for the readers of The Star. Nazirah is Head of Content at CompareHero, the leading Malaysian financial comparison platform, aimed at helping Malaysians save time and money. Visit CompareHero here

Bursa Malaysia to rebound next week on favourable external factors

Posted: 23 May 2014 08:52 PM PDT

KUALA LUMPUR: The local bourse is expected to rebound next week due to favourable external factors, said Affin Investment Bank.

Vice-President/Head of Retail Research Dr Nazri Khan said global equity markets should benefit from a relatively dovish tone from the minutes of the Federal Open Market Committe meeting with prospects for easy monetary policy to remain intact for the foreseeable future.

"Signs of global monetary easing paved the way for global equities to edge higher, with underlying support coming from the latest signals from the US Federal Reserve that it was in no hurry to start raising interest rates," he told Bernama.

Nazri expects a positive response to the mega listing of 7-Eleven Malaysia Holdings Bhd and Boustead Plantations Bhd in late May and June, respectively, to provide the local catalyst to the domestic bourse.

Stock-wise, he said traders should accumulate world cup-linked blue chip stocks which would do well as the event approached, such as TM, Axiata, Digi, Astro, Dutch Lady, Gtronic, MPI, Unisem, IJMPlant and KMLoong.

On the technical front, he said the FBM KLCI closed above the 20-day and 50-day moving average, indicating the trend was still turning up, however, momentum studies were trending lower suggesting an ongoing pullback.

 "We believe this is a temporary correction and a healthy pullback to the 6.2 per cent gain made since early February this year," he said.

Nazri said the next area of upside is the all-time-high near the 1,890 points and ultimately the 1,900 points strong psychological resistance.

From the market breadth perspective, he said there was a slight negative distribution with weekly decliners beating advancers by a moderate four to three on a slightly heavier average daily trade of two billion shares worth RM2.1 billion.

During the trading week, the FBM KLCI hit a fresh all-time high of 1,887.07 points and an intra-day high of 1,889.47 points on Monday.

The Plantation Index fell 150.87 points to 9,215.24, the Finance Index eased 5.66 points to 17,078.19 and the Industrial Index decreased 9.72 points to 3,196.99.

The FBM Emas Index fell 71.52 points to 12,923.95, the FBMT100 Index trimmed 70.54 points to 12,574.26, the FBM Ace erased 70.73 points to 6,598.67 but the FBM 70 improved 16.93 points to 14,049.04. 

Weekly turnover expanded to 9.6 billion shares, worth RM10.5 billion, from last week's 6.71 billion shares worth RM8.66 billion.

Main market volume rose to 7.42 billion shares, valued at RM10.03 billion, from 5.32 billion shares, valued at RM8.29 billion, recorded last week.

Warrant turnover appreciated to 276.33 million units, worth RM40.8 million, from 179.98 million units, worth RM37.02 million, recorded previously.

The ACE market volume increased to 1.67 billion shares, valued at RM403.68 million, from 1.2 billion shares, valued at RM323.76 million, registered last Friday. - BERNAMA

CPO futures to trade higher next week on speculative buying

Posted: 23 May 2014 08:47 PM PDT

KUALA LUMPUR: Crude palm oil (CPO) futures contract on Bursa Malaysia Derivatives is likely be trade between RM2,500 and RM2,600 per tonne on speculative buying.

Interband Group of Companies Senior Palm Oil Trader Jim Teh said next week's market could undergo a technical correction in cautious trading on uncertainties surrounding the market.
He said exports were expected to remain strong following the Ramadhan fasting month although the slow demand from China may cap gains.
Production of fresh fruit bunch was also expected to increase in May and June as the weather in these two months were most suitable for production.
For the week just-ended, the futures market was mainly bearish on the back of a stronger ringgit and weaker soybean oil market.
On a Friday-to-Friday basis, June 2014 decreased RM88 to RM2,541 per tonne, July 2014 lost RM67 to RM2,525 per tonne, August 2014 fell RM63 to RM2,517 per tonne while September 2014 slipped RM60 to RM2,582 per tonne. Weekly turnover rose to 171,620 lots from 117,248 lots last week while open interest narrowed to 208,997 contracts from 214,777 contracts last Friday.

On the physical market, June South eased RM20 to RM2,550 per tonne. - BERNAMA


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