Don't be a lemming, think before you leap

LOOK BEFORE YOU LEAP: Investor lemming behaviour is common.
LOOK BEFORE YOU LEAP: Investor lemming behaviour is common.

I've been watching lemmings. A lemming is a small Arctic rodent known for regular mass migrations where they rush headlong into the sea and often end up drowning. The lemmings I have been observing are the investor kind who behave in a similarly stupid fashion.

Investor lemmings are those that follow the crowd into an investment without doing any research themselves. They just as easily follow others out depending on how well or badly the market does rather than how successful the company has been in delivering on its business model. This emotional rather than rational investing often leads to the lemming investor making big losses because they got into the market too late when the stock was over-valued and left too early before it had a chance to recover. Savvy investors - take the NZ Superfund as an example - are contrarian, doing their homework on the fundamental worth of the company and investing by going against the crowd.

This herd mentality has been evident with a selloff of US technology and biotech stocks, arrested last week only once concerns were eased about the timing of future interest rate increases by the Federal Reserve. You could argue it was just a natural correction as these companies were arguably trading at lofty valuations and just returned closer to realistic levels. Analysts said US-based investors had been profit-taking on many listed cloud-software firms and this had an impact locally, most notably on former sharemarket hero Xero where investors scrambled to take profits off the hype they had bought into. The cloud accounting software company lost $774 million of its market capitalisation in just two days of trading last week. Unlike the US tech stocks, Xero's share price rebounded then dropped by the end of the week, trading around $30 - well under its record high of $45.99.

The other impact on Xero may have been due to comments from Woodward Partners analyst Nick Lewis who forecast Xero's share price could fall below $20 if it failed to achieve significant success in the US. Xero founder Rod Drury responded it was far too early to judge its US foray but indications were positive.

The biggest problem I see with Xero getting caught in lemming-like behaviour is the impact this could have on other listed Kiwi tech stocks and the pipeline of small to medium-sized companies eyeing up an IPO this year. Eroad, Gentrack, Intueri, and Triplejump have said they're sizing up such a move. Xero's sharemarket success has attracted others to also list or consider doing so. This is good for our capital markets but, contrarily, Xero bombing out on the bourse could serve as a detractor to others.

Think before you leap.

Sunday Star Times