WELLINGTON NEWS

Hokitika Guardian, 9 October 1929, Page 5

WELLINGTON NEWS

THE HERD INSTINCT AND INVESTORS. (Special Correspondent.) WELLINGTON, October 8. The Stock Exchanges of the Dominion provide an interesting example of mass movements or mass insanity or what may be .termed more correctly the herd instinct. Ihe psychology of market is always interesting and the herd instinct has special cvportunitici3 for free play in Stock Exchange transactions, because active operations are in relatively lew hands, that of the brokers, and the attitude of the general mass of investors is necessarily that of lookers-on. The spectators it is true nominally give the orders and ultimately pay the piper, but whether consciously or unconsciously, it is the brokers who call the tune, and this is done mainly by that example and suggestion that are so effective in imitating and maintaining mass movements. It has been noted for some months past that bank shares were strong favourites with investors, and on almost every exchange in the Dominion there were daily sales of bank shares, and the reports of these sales and the knowledge that others weite buying bank shares led to a mass movement in that direction. The herd of investors followed the leaders, and , brokers themselves were carried away by this psychological movement, and divested themselves of that fine sense of judgment that would ’ have ■ enabled them to have, warned their customers against the folly of forcing up prices; by competition. The volume of bank shares available for sale at any given moment is necessarily limited and the soiling broker naturally seeks to get. the best price for his client, asks a Ishiade more than the -market' value and gets it. While the herd, was stampeding bank shares the game was, thrilling and enabled the brokers to call the tune, and now that the mass ; movement is. in the other direction, '■ those who were swayed, by the herd! instinct and plausible arguments, find; that instead of making money, they ; will in a good many cases lose tidy. sums. , ; .<•' . ■' > r., ,

In this matter no blame can be attributed; to the banks for they have ; no control over Investors, > who are; free to, buy shares as they will. Nor; can any adverse comments be level-; led at the banks because' bank shares: have.fallen, the blame nests partly on' the investor and partly on the broker. The earning capacity of the banks has not been 'impaired in any way by the advance in the Bank of England rate, on the. contrary it is very likely that bank profits will, expand. The banks can now profitably employ ev'er,y spare penny 7 • they pos-, sess, and the demand on them by needy borrowers will tend to increase rather than decrease, so that the position of tho banks -• is one - ;of strength and the profit potentialities are great, yet bnnk shares have declined. An example or two will convey to the reader some idea of what has happened recently. About a fortnight ago Bank of New South Wales: changed hands at £sl 15s, a few, days ago this same bank shares were offered for sale at £49 15s, so that the investors stand to lose more than £2 per share or about 4 per cent in about 16 or 18 days, and it must be admitted that it is a quick way to lose money. Other bank shares show the same relative decline, so that it must not be thought that the Bank of New South Wales is singular in this resoect.

Why have bank shares fallen so heavily ? Reverting' to the case of the Bank of New South Wales this old and solid institution will pay its quarterly dividend towards the end of this month, and with respect to the quarterly dividends of this bank they are like the automatic repoti-. tion of a recurring decimal. One can make certain of receiving that quar-, terly dividend on due date. Now, if the shares were worth £sl 15s in mid September, they should be better worth that money now for the dividend will soon be paid. But by some' process which, is more or less of a mystery the shares are depressed to £49 15s and it is difficult to give a solid reason for that. The only sound reason for such a security to fall is that money is dearer and that an investor has the . right to expect a better return, which is'" quite true, so, the shares are marked down. But the. probability of money being dearer has been apparent for the past seven or eight mohths, and yet is safe to say that no sharebroker warned any. of his olients of the risks which, would follow on the heels of ■ a rise in the Bank rate. It is doubtful if any sharebroker gives any consideration to the trend of the money market and the effect of the variation in rates. The herd instinct dominates the broker as it does the investor. He sees one astute broker putting clients into hank shares, he does the same and the herd naturally follows. The depression is due to some extent to the inability or the apathy of the brokers in studying conditions that have a bearing on market prices. They should have seen that money would be dear and communicated that to their clients. Anyone who has the inclination, the money and the character can become a sharebroker by buying a seat on the Exchange. There is no ability qualification for the game.