Private investors buying shares again – unfortunately in line with the trend

The number of shareholders increased in Germany last year according to the DAI (Deutsches Aktieninstitut), and March 18 was “The Day of the Share” in Germany. This is good news. However, holdings of shares were once again replenished in a bull market. Stock exchanges are governed by other rules than those of everyday life: buyers are only too happy to make purchases if major retailers offer discounts on such campaign days. On the stock market, by contrast, investors buy when prices rise and sell when prices fall.

How can this be explained? When things head upwards, investors want to participate in the success rather than miss out. Social proof (i.e. when people conform to the behaviour of others) defines their actions. The tendency to sell when prices are in decline, on the other hand, is probably caused by an escape reflex that has been anchored in human behaviour since man walked the earth. Uncertainty on markets sends a signal to investors: „Don’t like the look of this – let’s get out.“

Yet there’s no mammoth waiting to devour investors in front of the stock exchange, eager to take a bite. We’re „only“ dealing with money here and not a life and death situation. Investors mostly behave irrationally on stock markets, yet there isn’t a great deal they can do about this. There is so much to argue in favour of investing in shares. The most important argument is that share prices clearly outstrip inflation over a long period of time. Since 1968, German blue chips have been chalking up an annual return of 7.7%. This corresponds to value growth of 4,395%!

Despite the encouraging increase in the number of shareholders, the significance of these figures is only limited. In recent years, the population of Germany has grown considerably. In addition, many German shareholders are not actively involved in stock market happenings, but hold „dormant“ securities accounts. There is still a large number of shareholders who bought shares in Deutsche Telekom 20 years ago (as the so-called “people’s share”) and who have no interest in selling them because of the loss they will incur. If allowance is made for these factors, it is clear that there can be little talk of stock market euphoria among German private investors. In 2000, every taxi driver was giving tips on what to trade in, but you won’t experience anything like that today. Valuations are also too low for a bubble to form on the stock market.

For investors active on stock markets, the behaviour of private investors is of marginal importance. What counts for them is the sustainability of the business model, the quality of management and the valuation of the share.

Any reasonably optimistic investor who believes that the world will have progressed further in 30 years’ time compared with today would do well to invest a large part of his/her assets in stocks. This applies in particular to young investors, because they will be able to exploit the compound interest effect for longer and „defy the mammoth“ in times of crisis. Many German companies have survived wars and crises because of entrepreneurs’ ability to operate long-term and strategically. The heads of central banks and policymakers, by contrast, operate in the short term because they come and go every four years. Investors should take advantage of this – either by making regular payments into fund savings plans or by making one-off investments in demonstrably good equity funds and certificates.

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