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Dr. Niu Xiong is a veteran in the stock brokerage business and hosts a radio programme for audience to phone in to get some advice on their stock investment. Here are two typical conversations.
Ms. A: I want to hear your opinion on ‘0005’ (HSBC).
Dr. Niu: How much did you pay for it?
Ms. A: I bought it at $70 in late 2012.
Dr. Niu: Then you should have collected about $15 dividend. You have now made good profits.
Ms. A: What should I do with it given it has risen more than 5% in the last week?
Dr. Niu: You can hold on to the stock for a while. If the Shenzhen-Hong Kong stock connect scheme is implemented sooner than expected, then the price can easily go up another 10%. Then you may improve your profits further.
Mr. B: What’s your view on HSBC?
Dr. Niu: How much did you pay for it?
Mr. B: I bought it at $40.
Dr. Niu: Wow, it was a very good price. You must have bought it in 2009 after the Global Financial Crisis.
Mr. B: What should I do now?
Dr. Niu: HSBC has risen quite a lot in the past few days in response to the company repurchase programme and the anticipated Shenzhen-Hong Kong stock connect scheme. However, if the repurchase programme ends soon or the Shenzhen-Hong Kong thing does not happen soon, then the stock price could easily drop by 10%. You can consider cashing in now and not take the risk.
It is very common for a pundit to begin by asking the caller, ‘How much did you pay for it?’ as if the purchase price really matters. In fact, it has nothing to do with the future price of a stock. For any stock or other instrument of investment, the decision to buy, hold or sell is independent of how much an investor has paid for it. This is the notion of ‘Historical Price is Irrelevant’. The future price of HSBC, or any stock for that matter, has nothing to do with whether you bought it at $70 in 2012 or at $40 in 2009.
The conversations between the host and the callers are generally nonsense, i.e., there is no meat and nothing expert about the advice given. But these radio programmes do serve one important function: the majority of callers need some ‘good words’ to comfort them rather than ‘expert opinions’ to guide them in investing. In this sense, they prescribe the placebos for the anxious investors.
This article was originally published in No. 483, Newsletter in Sep 2016.