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Emotional versus objective investing

The Maltese stock market has been, at most, nominally affected by the drastic falls in share prices witnessed on the international markets following the 11 September tragedy. Only a slow-down in trading has been noted locally. This demonstrates that the Maltese investor is indeed a strange breed, as are most investors for that matter.

One must never forget that, when witnessing the fluctuations on a market, we are not seeing a reaction to hard facts and figures, but instead the psychology of those who are actually playing the market.

There can be no denying that the market has been suffering from a slow-down of late, following the corrections that altered the share prices of the companies listed on the Exchange.

This was the first time that Maltese investors had experienced a local bull market. Thankfully, market corrections traditionally come around only every seven to eight years and presumably the next time around the correction will not be taken quite so severely.

Despite that, if one were to look at the turnovers at the Exchange, those that had pushed prices down were relatively low compared to the number of shares in issue by these companies.

The market as it stands today offers investors a narrow selection of companies and a lack of depth. When the market would have a situation in which an investor sells off 1,000 shares and that stock’s price depreciates by 10c, it affects the overall capitalisation of the market and the evaluation of all the funds. When this happens, you get people panicking – quite a normal reaction, but one that must be tempered with time.

It is fully understandable if an investor becomes reluctant to invest all his capital on the basis that it might be worthless the next week.

Investor confidence is affected by each and every piece of news. For example, when the government announces that it is about to privatise a number of companies and it actually lists the companies then, two years later, nothing has materialised - this has a bearing on investor sentiment.

No one is an expert in market timing, not even the market makers themselves – although they would have a finely honed sense in such matters. Such matters are unpredictable but there is a practical solution and that is to avoid committing all one’s capital in one single investment. Unfortunately, local investors appear to be missing the point that now is, in fact, an ideal time to buy. A low market offers prime conditions in which to spin a profit.

However, most people invest emotionally instead of objectively and this decision making process must be reversed if profits are to be made and if the market is to blossom.

Investing on an emotional basis is by no means a trait unique to the Maltese investor, it is a global phenomenon. Although it is less pronounced in the more developed markets, people nevertheless tend to make emotional investment decisions the world over.

The stock market is like many other things in life, one can buy something when it's out of fashion and make a tidy profit from it when it comes back into fashion - regardless of whether it’s a painting, antique, book or a share.

The Business Times, Network House, Vjal ir-Rihan San Gwann SGN 07
Tel: (356) 382741-3, 382745-6 | Fax: (356) 385075 | e-mail: editorial@networkpublications.com.mt