EPIC STORY OF BEHAVIORAL FINANCE

In the midst of every crisis, lies great opportunity - Albert Einstein

Everyone today is fighting the biggest problems of their lives, COVID-19. While we all are dealing with it in our own ways, some are also trying to grab opportunities that come up in these times. But when in distress there are high chances that one gets blindsided by events. 

These challenges led to increase in valuations for pharma stocks and medical supplies companies. One such event occurred recently. Call it a case of mistaken identity or gimmick by share market punters, but a penny stock named Bombay Oxygen, got the blessing of investors in the past few days. The stock more than doubled in the past 20 days from Rs.11,200 to Rs.24,575. The stock ended at a 5% upper circuit on Monday. 

Wondering why? Because of the word “Oxygen” in its name. Companies in the pharma sector, chemical sector and the ones producing industry gas or oxygen manufacturing, are selling like hot cakes in the share market. An example of prosperity in adversity. Adversity being the ongoing pandemic and opportunity being the increase in value of the companies who are serving the country with the solutions for the same. Sounds like a logical buy right? 

Though the company has the word oxygen in its name, it is actually an NBFC and has no relation to oxygen supply. Undeniably investors had a valid logic behind buying this stock, but as I said earlier they were blindsided. They missed out on the fact that the company had exited the business of producing industry gas way back in 2019. Its currently registered as a non-deposit taking NBFC, with a turnover of Rs.50cr for the nine months ending December 31, 2020 and a net profit was Rs.49 cr. 

The rally was short lived though. As this news got out, in just one day investors started dumping their shares of the same company. The share price hit a lower circuit today as the investors got a whiff of what exactly happened. The share stands at Rs.23,346 today.

This is a classic case of behavioral finance, wherein the investors worked on their instinct and market trend and got trapped on their way. Behavioral finance studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals and institutions and how those decisions vary from those implied by classical economic theory.

Its human to err! One can make an error while making calculations too. But behavioral finance is that branch of finance, that defies logic and works on instincts. The series of events mentioned above explain how the investors who don’t invest a penny without extensive research also at times act on impulse. Sometimes it’s for good while sometimes bad.  

Watch this space for more updates.