Caroline Ritchie: Invest in value, or pay the price

Cosmetics.  Husbands, these are the unfathomable items causing fiscal collateral damage to the joint account. Women, as you know, these are the products that make modern public life bearable. At least, that's the perception.
Enter the digital photographic revolution. That's the thing that gives us millions of multi-processed pictures of made-up perfection every day. Images that are far from reality and far out of reach. But the human brain is a striver.
It was created to compete. Research shows that the preparatory time used by females prior to social events has very little to do with impressing masculinity. Rather, it is to do with making other women feel jealous and slightly inferior. That underlying human pathology has built vast face-painting fortunes. The price/value continuum for colour cosmetics is incredibly subjective and elastic. There is a strong underlying force driving these consumers to buy the promise of a better visage than the lady next door.
Market psychology can have similar effects. The promise of easy money lures people into penny stock territory with cash that should more properly go into bank accounts. Still, and yet, the perception exists that a share trading at 5 cents has more potential than one trading at $500. When investment is done on this premise it's basically called gambling. Let's take an example. There is a company trading on the NZX for around 1.1 cents. Golly, one supposedly thinks, that's only got to increase in price to 3 cents and I could make 173 per cent. Notice I didn't say increase in "value".
The chances of this company increasing in value are very small and the chances of it going bust are very high. Avoid. There is a slightly better outfit trading on the New York Stock Exchange for US$332 ($418). This company, however, is going places. If you care to read the analytical notes put out by the 27 investment houses that cover the stock, you might be delighted to know that the current 12-month price targets vary from around US$445 to US$485. A potential 48 per cent gain from a big cap blue chip? Absolutely. Because this organisation actually makes money. The lure of the "cheap" stock is linked not just to the so-called percentage possibilities. In shares this is where the "tick" value on some exchanges is limited to 1 cent increments - hence if something is trading at 5 cents and goes up by 1 cent, the smallest incremental move allowed, the percentage increase is 20 per cent. You can see on the surface the attraction. In this arena the old "beggar thy neighbour" mentality is in force, too. Some chaps always want to do better than the next guy.
Investors in this mindset who sink cash into random penny dreadfuls can also be the type to want everybody to know about it. But only when it goes well.
Like the bad Botox or the wrong shade of foundation, the mistakes can be fixed up and forgotten, but at a cost. The cost depends on how many donkeys you backed to carry your load. Hopefully, in the case of the now fully informed investor, zero donkeys.
Caroline Ritchie is an NZX Advisor for Forsyth Barr in Napier and holds an NZX Diploma, BCom and BSc. For sharemarket advice contact her on (06) 835 3111 or caroline.ritchie@forbar.co.nz.
The comments in this note are for general information purposes only. This article is not intended to constitute investment advice under the Securities Markets Act 1988. If you wish to receive specific investment advice, please contact your Investment Advisor. Disclosure Statements for Forsyth Barr and any of its Investment Advisors are available on request and free of charge.