Understanding Investor Psychology: Why News Events Trigger Buying Decisions

As someone who's been deeply involved in the unlisted shares market since 2018, I’ve repeatedly observed a recurring pattern: investors show little interest when a stock is available at a decent valuation, but the moment a news-based event like an IPO announcement happens, the interest spikes. Let’s delve into why this happens using the case of Waaree Energies.

The Case of Waaree Energies

For nearly six months, Waaree Energies' unlisted shares were available at a steady price of around ?2000-2100. Despite the attractive valuation, very few investors were interested in purchasing. The stock remained quiet, with hardly any trading activity.

Fast forward to today: the IPO announcement for Waaree Energies has been made, and suddenly, the stock has surged to ?2650. Now, investors are clamoring to buy, driving up both demand and price.

Key Psychological Triggers for Investors

1. Fear of Missing Out (FOMO): This is probably the biggest driver behind investor behavior during news events. When a company like Waaree Energies announces an IPO, there’s a fear among investors that they might miss out on significant future gains once the stock gets listed. This sense of urgency propels them to take immediate action, even though the stock may have been available at a lower price for months.
2. Herd Mentality: The moment news spreads about an IPO or another major event, a large number of investors start showing interest. This creates a ripple effect, where others follow the trend, assuming that if everyone is buying, it must be the right time to get in. Essentially, people feel reassured by the actions of others and follow the crowd.
3. Perceived Value Shift: An IPO or similar event tends to change how investors perceive the value of a stock. Suddenly, what seemed like a regular investment becomes a 'hot opportunity' because the company is moving to a higher level of public attention. Even though the fundamental value of the company may not have changed overnight, investors see the potential for quick gains due to the possibility of increased liquidity and public interest.
4. Recency Bias: Investors often give more weight to recent events than historical data. When an IPO is announced, the positive news overshadows the fact that the stock was available at a lower price earlier. They believe the company's value has suddenly increased because of the recent event, when in reality, the fundamentals might have remained the same.

Why You End Up Paying More

This behavior, while common, often leads investors to buy at a higher price. The market typically adjusts to such news events immediately. In Waaree Energies’ case, investors who were hesitant when the stock was at ?2000-2100 are now willing to pay ?2650 after the IPO announcement. In essence, they are buying after the price has already surged in response to the news, leading to a reduced margin of safety and potentially lower future returns.

Long-Term Strategy vs. Event-Based Buying

Smart investors often act before a news event occurs. They understand that value investing is about recognizing a stock’s potential when it's fairly or undervalued, not when the price is already surging due to news. Here’s a more strategic way to approach unlisted shares or pre-IPO investments:

• Do Your Research Early: Analyze the company's fundamentals, market potential, and growth strategy when it is still flying under the radar. Don't wait for an IPO announcement to make your move.
• Avoid Emotional Buying: Decisions made in a hurry, especially during market hype, can lead to buying at inflated prices. Maintain a disciplined approach and resist the urge to follow the crowd.
• Think Long-Term: Don’t buy just because everyone is talking about an IPO. Evaluate whether the stock will offer value over the long term. Ask yourself: Would I still want to hold this stock if the IPO doesn’t perform as expected?

Conclusion: Be Ahead of the Curve

Investing based on news events can often lead to missed opportunities and higher purchase prices. The ideal time to invest is when a stock is fairly valued, not when it has already surged in response to market hype. Early movers who invest based on thorough research and a solid understanding of the company's fundamentals tend to reap better long-term rewards.

So, the next time you consider buying unlisted shares, don’t wait for the crowd to validate your decision. Be proactive, and make your move when the price is right, not when the news cycle dictates it.

– Umesh Paliwal, Co-founder UnlistedZone