From the tears of British chancellor Rachel Reeves to the tariffs of US president Donald Trump, current events can spook investors and cause trade shocks. But by and large, investors are guided by data rather than raw emotion – or are they?
We chat to Greg Davies, head of behavioural finance at Oxford Risk, to find out what are the key factors – from bad press to product delisting – that may impact investor sentiment . . .
“There’s a difference between what people say drives their decisions and what actually drives their decisions,” Davies opened. “In all investing, there’s a gap between the financially sensible decision and the emotionally comfortable decision. And to a very large degree, all of us make decisions that are driven by our needs to feel comfortable with that decision.
“Some people are a little bit more dispassionate than others, but the factor that drives a lot of us is familiarity: is this a name I recognize? Do I use the products of this company? Is it a company that employs friends and family? None of these are very good reasons to make an investment, but they are reasons that make people comfortable.
“We all fly away from stuff that feels unfamiliar, uncommon, things outside of our sphere of knowledge. So familiarity is key.”
Narrative power
The kind of press a company receives is a big factor, too. “Whether it’s about the stock price going up or something good about a company’s products – anything that makes an investor feel comfortable about that investment [matters]. Because they can attach its name to a positive narrative.”
“We’d like to have an easy rationale for the things that we do – but often, the stories we tell ourselves aren’t necessarily true.”
How a business is perceived – or what its ‘mission’ is – matters even more for start-ups vying for investor attention. For most retail investors, start-ups are inherently risky, but for some, the risk is the big pull.
“Investors will often invest in things partly for identification purposes. [For example], they are deliberately going for the start-ups because they want to find the new, exciting thing,” Davies told us. “The source of comfort are mental tags, like seeing themselves as ‘start-up investors’, which ticks the boxes of ‘AI’ or another on-trend area.”
Meanwhile, major divestitures resulting in a new business entity forming – such as Fonterra’s consumer business sale and Unilever’s Ice Cream demerger – can be attractive thanks to big-brand appeal and backstory and the new ventures’ perceived newness.
Product failures may be ‘less memorable’
A single failed product may make little difference to sentiment. “The effects of that would be relatively short-term and relatively muted - unless you’re counting a sequence of failures in a row,” Davies said. “But any one of them is likely going to be less memorable and visceral.”
On the contrary, a notable product success ‘is a story that tends to go on for much longer than a product failure’, Davies added.
So what makes investors jittery?
“When investors are looking to buy or to hold, the thing that is most immediate and visceral is what has the price [of a particular business] done recently. So even if it is unrelated to fundamentals, a recent drop is often something that people will feel very nervous about.”
Bad news can also play a role. “Negative media press drives the price down fast – that should be, for many investors, an indication to buy because [the price has] overshot and it’s good value.”
“But the emotional response is, ‘I’ve got two reasons now not to buy’ – the bad press and the negative price performance,” Davies added. “You have to overcome these aversions to bad news, to recent performance.
“As an investor, what you should be trying to do is not buy things that are ‘good’ or ‘bad’, but such that are relatively lower priced than they should be; things that are unpopular, but where the unpopularity is not justified by the fundamentals.”
Greg Davies, Oxford Risk
That’s where data analytics and price modeling come to the fore, guiding professional investors in making less emotionally-driven decisions. But when the markets tumble – such as when US president Donald Trump announced his Liberation Day tariffs – emotions can still run high.
“If the markets are going down, people often will be inclined to think they need to sell something. They will often look to sell the things that either haven’t gone down or have gone down by less, because selling something at a loss is very emotionally painful.
“What you often see is that people would sell something that hasn’t dropped and then hold on to the ‘losing’ assets in the hope that those will get back above zero again.”
Legal disputes: the good and the bad
As for high-profile disputes such as Ben & Jerry’s lawsuit against Unilever in the US, there can be different dimensions of impact. Some investors may be swayed by bad press but for others, a company’s mission would take precedence.
“There are those for whom the values expressed in their investing are very important – and in the case like this, you can see it going in both ways,” Davies said. “Some might think the negative press is negative, but it reinforces their belief that that company is aligned with them – and thus have an emotional reason to stick with it. For others, it may be the opposite.”
“The individual financial personality makes a huge difference in how that person is going to respond.”
Legal disputes that are inherently linked to a negative story – such as the NEC class-action lawsuits against Abbott Nutrition and Reckitt Benckiser-owned Mead Johnson – are more likely to dent sentiment. “Investors are almost certainly going to have some sort of negative emotional response to that – though there is the pool of professional investors who would not be interested in the emotional side and may take the opposite stand. On the whole, I would imagine there would be a negative and depressing effect on the price.”
Advice for retail investors
So how can retail investors contend with the ups and downs of current events and changing industry trends to make the most sensible decisions?
“Try and make sure that your emotional time horizon is aligned to your financial one – don’t be too short-term,” Davies explained. “Try to think about what the effects in the long run – is there a business case for buying this over a period of years, not days and weeks?
“And diversify. Look for themes that resonate and themes that you think are going to play out over the next few years – but don’t bet it all on one.”
