That’s not my name!
Did you know confused investors waste millions of dollars/pounds/euros/yen every year buying the wrong shares?! Let me tell you a quick story.
In the past few months, millions of small retail investors have had a tumultuous ride particularly for investors in ‘Clubhouse’, a social network, which was launched as recently as March 2020. Clubhouse creates audio chatrooms in which users can listen to live conferences although they can only do so if they have been ‘invited to join’ the platform by existing members. You may ask, why am I telling you about this?
Well, by January 2021, Clubhouse’s exclusive audience had grown to some 2million active users, including social media influencers Oprah Winfrey and Elon Musk. The app also took off among Mandarin speakers around the world, who used it to discuss everything from the Chinese government’s detention of Uyghurs and the Tiananmen Square protests of 1989. Some users joined from mainland China, but on February 9th the app was blocked by China’s “great firewall”.
When Mr Musk tweeted he was joining the platform on January 31st, the share price of Clubhouse Media Group soared by 117%. Unfortunately, trigger-happy retail traders had failed to spot that ownership of the Clubhouse app, like membership, is by invitation only. The social network is not publicly listed. Clubhouse Media Group is a wholly separate firm, based in China, which trades under the ticker ‘CMGR’. Once its ‘new’ shareholders spotted their mistake, its price tumbled back down!
However, Mr Musk’s tweets have form and have led to a similar hiatus before. On January 7th he ‘instructed’ his 46million Twitter followers to ‘use Signal’, an encrypted messaging app. Investors promptly bought shares in Signal Advance, a medical-device company from Texas with one full-time employee! At the peak of the frenzy, its share price rose more than six-fold before falling back when the tweeters realised their error!
Confusion over stock names is not new. In the late 1990s, investors eager for shares in MCI, the American telecoms firm, accidentally bought MassMutual Corporate Investors, a closed-end investment fund with the ticker name ‘MCI’.
In 2013, traders intending to purchase shares in Twitter instead bought up Tweeter Home Entertainment, a bankrupt consumer-electronics firm, a month before the social-media platform went public. In 2017, retail investors confused Snap, the parent company of Snapchat, a messaging app, with Snap Interactive, a software company.
In 2020, some investors even mixed-up Tesla with Tiziana Life Sciences, a biotech firm with the ticker ‘TLSA’ and probably the most reported ‘wrong pick’ during the pandemic was Zoom. The Zoom story qualifies for this article as being the most popular Covid-induced surge. The surge in users of Zoom, a video-conferencing service, coinciding with a spike in investment for Zoom Technologies, a small Beijing-based holding company that traded under the ticker ‘ZOOM’. In all these cases, when the retail traders realised their error, the surge in stock prices rapidly collapsed, catching many small traders out and costing many a pretty penny (see table!).
In hindsight, we can have a smile (God knows we need a smile these days) when we read these stories but these apparently trivial errors can be costly. A paper, published in 2019 by Rutgers University, analysed US stock market data from 1993 to 2013. The paper studied 31 cases in which investors probably mixed up a pair of companies. In these instances, about 5% of the annual trading volume of the smaller firm in each pair (such as Zoom Technologies and Signal Advance) could be attributed to confusion. Overall, the authors reckon that investors frittered away about $66million on transaction costs for these muddled purchases. They did not calculate the costs to careless traders of buying the wrong shares at too high a price or put a value on their embarrassment!
The moral of the story is we can all make mistakes but we also need to be careful not to behave like sheep. When you are looking to invest in stocks and shares speak to the professionals, take the necessary advice and tread carefully before you buy! Names are powerful but the menu is not the meal.
Should you require any further information please speak to your Prosperis adviser on 01423 223640 or email us below.
