Managing Fear and Greed in Investment

During the last two decades of the 20th century, especially after deregulation, the City of London became fixed in the public mind as a place of aggressive and reckless stock market trading. Fear and greed characterized the image if not always the reality. If this was ever true is it still so today and how have shifting investor profiles changed the culture?

In the financial sector, there is a perennial impulse to define the nature of the average investor. The advent of the multilateral trading facility has the potential to open up the market as never before and the formulation of a widely applicable customer profile is seen as an essential aid in meeting demand. However, this pursuit invariably encounters the brick wall of the question: what is average?

The polarity of fear and greed

If we take Germany as a good example, we immediately see that investment in the stock market has not engaged the public as it was forecast to do. In 2019 only 15% of Germans owned shares. More than half this number did so only indirectly through investments such as pension funds. Of the remaining few, the risk profiles were not evenly spread but occupied the extreme ends of appetite and aversion. Even the attractions of a multilateral trading facility across the EU have failed to address this polarisation. Any average calculated on this basis would present a highly unrepresentative picture.

In the early days of the New Market, many first-time investors were attracted by the success of others, motivated largely by greed and the hope of a quick return. When their experience turned sour, they withdrew from the market just as quickly. The perfect paradigm of greed and fear in action. And yet it should be stressed to potential investors that fear and greed are not inherently negative and can in fact be the drivers of an effective and sensible investment strategy. Furthermore, the market structure is changing all the time with the flow of capital greatly enhanced by developments such as the multilateral trading facility pioneered by Spectrum.

What those investors who took flight did not appreciate was the need for hedging strategies alongside investment in individual stocks and the importance of limiting such investments to a modest part of any portfolio. In a mature economy, it is not healthy for the majority of potential participants to be left without a secure grounding in the realities of the processes, risks and rewards of investment. There is a pressing need to address this through a programme of education and awareness campaigns. While basic financial responsibility is now regularly taught in schools, the scope of the subject needs urgently to be expanded.

Education into wealth

Economists and educationalists need to work together to devise a study of the stock market which covers its history and principles as well as its participants and functional patterns, financial instruments and the advantages of regulated trading such as at a multilateral trading facility. Why is this essential? Because personal wealth, medium term financial goals and long-term prosperity are heavily dependent on the opportunities for growth which exist uniquely in the investment market.

To take Germany again, at the time of reunification, the index DAX stood at 1,000 points. Today it is 14,000. In the meantime, interest rates since 2007 have been at their lowest for decades which means the rate of return on savings has been negligible and, at well below inflation, represents a loss. The money to provide for a comfortable future will not come from savings any time soon: true growth can only be achieved by effective, intelligent engagement with the market.