Young Investors and the Casino Phenomenon
If we look further, the biggest contributor to the increase in the number of investors is the younger generation, namely investors aged below 30 years (Generation Z) and 31-40 years old (millennials/Generation Y).
Amid the Covid-19 pandemic that has continued to grip the Indonesian economy until now, the capital market has contributed to the economy as an alternative funding source.
Throughout 2021, funds totaling Rp 363.3 trillion were raised from the capital market, up 206 percent from 2020. The funds were raised through initial public offerings (IPOs), limited public issuances (rights issues) and debt securities (bonds).
Interestingly, the public’s interest in capital market investments has increased sharply. By the end of 2021, the number of single investor identification (SID) issued to capital market investors reached 7.48 million. This figure is an increase of sevenfold compared to 2017. In fact, this trend will continue in 2022. In January 2022, the number of investors had increased to 7.89 million SIDs.
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Problem of Investment Literacy
If we look further, the biggest contributor to the increase in the number of investors is the younger generation, namely investors aged below 30 years (Generation Z) and 31-40 years old (millennials/Generation Y). At the end of 2021, the accumulated assets of these young investors reached a total of Rp 138.4 trillion.
Their contribution also increased the average daily trading value on the stock market to reach Rp 13.4 trillion in 2021, up 45.6 percent from Rp 9.2 trillion in 2020.
Role of social media
What are the factors driving the high interest among young investors to invest in the capital market?
First is the decline in the deposit interest rate at banks (savings accounts and time deposits), which has shrunk the real interest (nominal interest minus taxes and inflation) that banking consumers are receiving.
Second is the rapid development of social media platforms, which is often populated by celebrities and influencers flouting their wealth and lavish lifestyles, wrapped in a narrative that they gained all this from trading on the stock market.
Moreover, not a few of these celebrities and influencers recommend certain stocks that they claim will earn large profits in a short time.
In fact, the fundamental conditions (business and financial performance and management) of the recommended shares are not yet clear.
The problem is, quite a number of young investors simply swallow the boasts of celebrities and influencers without doing any research, like sheep (herding) following the sound of the shepherd’s voice. In fact, the fundamental conditions (business and financial performance and management) of the recommended shares are not yet clear.
Young investors do indeed tend to move in groups or flocks. First, shares with small market capitalization, or small cap stocks (non-blue chip), generally perform far better than stocks with large market capitalization (blue chip). Throughout 2021, for example, small cap stocks on the Indonesia Stock Exchange Small-Mid Cap (IDX SMC) Composite index posted positive growth of 26 percent year on year (yoy). Meanwhile, large cap stocks listed on the LQ45 index recorded negative yoy growth of 3 percent.
Second, the Indonesia Stock Exchange (IDX) suspended trade for 159 stocks in 2021. Most of these stocks were suspended because their prices had spiked dramatically in a short period of time with no fundamental change in performance.
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The herding behavior among young investors shows that many of them are not equipped with good knowledge and literacy. If this trend continues, it will not be healthy for the future development of the capital market. The capital market is seen as a mere casino and is being used only to make short-term gains. As a matter of fact, the capital market should be a place to create sustainable wealth and financial freedom.
This happened in early 2021, when young investors were very euphoric about the stocks recommended by celebrities and influencers.
It is proven that investment decisions based on herding behavior and not on good investment knowledge and literacy often lead to big losses. This happened in early 2021, when young investors were very euphoric about the stocks recommended by celebrities and influencers.
These young investors continued to seek these stocks, even though their prices were already very high. Sure enough, in just a few days the prices of these stocks plummeted, causing huge losses. News about the event went viral on various social media platforms. Some investors lost the money for paying their university tuition and some even went into debt from taking out loans to use as investment capital.
The authorities and existing stakeholders continue to carry out a variety of efforts to improve investment knowledge and literacy among young investors, including giving strong warnings against celebrities and influencers that make investment recommendations. This is because individuals can make investment recommendations only if they have obtained permission from financial authorities. Closing brokerage codes during stock trading hours to minimize herding.
Emotional control
Of course, knowledge and literacy alone are not enough to succeed in the investment world. Another factor is emotional control, which requires persistent training. One way of identifying an investor with self-control is seeing how they stop buying when others are eager to buy, and when they are bold in buying when others are selling.
It must be admitted that many young investors in the herd are unable to control their emotions. This can be seen from the herding and excessive euphoria. Also, they often suffer from the phenomenon called the “fear of missing out” (FOMO), which refers to a fear of being left out when many people are chasing hype stocks.
This is why Benjamin Graham, “the father of value investing”, said that the biggest enemy of investors in the investment world was their emotions. The inability to control their emotions often leads investors to failure, even the smartest among them.
Sir Isaac Newton, the genius physicist who discovered the theory of gravity, was plagued by an inability to control his emotions. In 1720, using his great ability in mathematical calculations, he made a huge profit from investing in the shares of the Sea South Company. However, he became elated when he saw that the stock’s price continued to rise.
He became trapped in investment euphoria. He doubled his capital. However, it did not lead to a big profit but to the contrary, a big loss, because the stock price fell very deeply. This bitter experience was a valuable lesson for Newton, who said, “I can calculate the motions of the heavenly bodies, but not the madness of the people.” By “madness”, he was referring to that excessive euphoria he felt.
Such people always expect big and fast profits without ever taking the risks into account.
Newton's lesson has become an anecdotal response in the investment world when many people suffer huge losses because they were unable to control their emotions. Such people always expect big and fast profits without ever taking the risks into account.
Isn't this also what often makes people fall victim to fraudulent investments every year?
Therefore, in the midst of the high interest among the younger generation in investing as a means to improve their financial wellbeing, young investors need to equip themselves with investment knowledge and literacy and train themselves to control their emotions.
If this is done well, it is certain that they will enjoy financial prosperity that can be sustained for the long term. Be a smart investor who doesn’t just go with the flow. Happy investing.
Desmon Silitonga
Desmon Silitonga,Research analyst at PT Capital Asset Management; alumnus of the University of Indonesia School of Economics and Business (FEB UI) postgraduate program.
(This article was translated by Kurniawan Siswo).
