Benefits of Overreaction
There are many factors for shares’ price movement. I won’t talk about that basic stuff here. One of those, is, of course, supply and demand. Adam Smith even coined the term ‘invisible hand’ to refer that it is supply and demand that helps price reach the equilibrium point suitable for both parties. In the shares trading world, however, the invisible hand mainly influenced by what we call overreacting investors.
My friend recently teased me because the shares in ASX named G8 Education (ASX:GEM) fell down like crazy on 16th of August following their latest financial report. Yes, I currently hold those.
Before that great downfall, I speak highly of the share, influenced by ‘professional’ recommendation by Motley Fool and the alike. It was true that the share was widely recommended by investor sites. Motley Fool even released a 5-page report just to explain how great buy the share was.
I stayed calm. I have seen something like this. On June 2016, Medibank (ASXL: MPL) fell down 5.8% following a legal action (
), then immediately recovered the next month, although today suffered the same fate as G8 Education following latest financial report.
During the Brexit, understandably, all shares in the ASX hammered down. But keen investors know something was off with Transurban (ASX: TCL). While Brexit will surely affect the most company in Australia, what impact it could pull off with the number of people passing toll roads? Do people run away from Australia just because Britain leave the European Union? No *insert grumpy cat meme here*
On February 29, I consulted a friend regarding my interest to buy Super Retail Group (ASX: SUL) following the price drop after (guess what?) their half year financial result. My friend suggested to keep watching instead of immediately buying, and that was one of my biggest regret ever as if I listened to myself instead of my friend, I could’ve scored some capital gain since the recovery followed swiftly.
So, am I trying to say overreacting investors help us to buy good shares at discounted price?
NO ! They even help you score capital gain! On June 16, I scored more than 10% just in two weeks for selling Crown (ASX: CWN), following my purchase on June 7. While it is true that their restructure will increase shareholder’s value, the price swing shouldn’t be that high. (http://www.fool.com.au/2016/06/16/jackpot-crown-resorts-ltd-announces-restructure-to-improve-shareholder-value/)
Overreaction is what helps junior investor like me make good trades. I have limited capital, and building a dividend portfolio is certainly not a good idea. Capital gain is my way, and without overreaction, the margin would be too small to make profits on a consistent basis, especially if you are trading on Commsec like me with 19.95 flat rate broker fee.
Without overreaction, there will be no swing, no momentum for us investors. We should thank overreacting investors, but not to pursue their path.