INVESTMENT PSYCHOLOGY

James Law’s - Etesian Group

You can find the Etesian Group at www.etesiangroup.com.au

Contact James Law on 0409 199 547

I can also be found on Twitter and Linkedin

Location – Perth Western Australia

Client base includes Western Australia, South Australia and Northern Territory.

Why? not… Why not?

Four simple words with such complex depth of meaning and numerous permutations.

For the purposes of this discussion I wish to concentrate on negativity bias which is a natural psychological trait whereby people tend to place more weight on negative thoughts and emotions, rather than positive ones. There is strong neurological evidence favoring negativity bias. In the brain there are two different systems for negative and positive stimuli. But is it any more than a safety valve whereby emotion rules over logic? I think not. Is it really safer to eliminate all perceived risk, and if we do, what can we possibly achieve?

I have often observed that some of the balmiest schemes obtain funding whilst conversely some very sound endeavours get left on the shelf. Why?

I recently made a presentation to a broker. The product which was the subject of that presentation is very strong and has considerable merit. It has the potential to be a game changer in its sphere of influence. In spite of this the brokers reaction was that in the current business climate investors (and their brokers) would be more inclined to find reasons not to do something than they would be to proceed. At the time of writing I believe this product will proceed and be on the market before the end of 2013. What happened here?

I am associated with a property venture which has extremely strong financial fundamentals and produces excellent returns. There are not many opportunities for (passive) investors to earn an IRR in excess of 19% (p.a.), property backed with a 30 month exit strategy. Why then in a market like this is it so hard to obtain investment capital? Especially when Perth has an extreme shortage of residential property for sale and rent.

Why do investors act like lemmings? When the market is overheating people keep investing until inevitably they get burned, however when the market is down people sit on their money and won’t invest. What happened to counter cyclical investment?

One of the richest people I have met epitomizes the concept of counter cyclical investment. After cyclone Tracy (Christmas 1974) destroyed Darwin many people sold out and / or never returned to Darwin. Instead of being negative and joining the vast throng that abandoned Darwin this person borrowed every cent he could and bought property. He kept on borrowing and buying. As Darwin recovered he became one of Australia’s richest men. There was no trick to it. Logically it was inevitable Darwin would recover. Indeed viewed in perspective his business risk was quite low. Servicing the loans was his primary risk.

So what are we really dealing with? Logic versus emotion, pursuit of excessive safety, or some form of ingrained psychological mechanism? You decide! Where do you sit in this spectrum? Are you weighing your investments impartially and effectively? Are you missing real opportunities?

In my view impassionate logic and cold common sense should always prevail.  

Contact James Law on 0409 199 547 or at james.law@etesiangroup.com.au today to discuss how best a review might be implemented within your business.

Cheers

James Law

0409 199 547