It has been worst for the many small savers who threw themselves at the debt-laden airline Norwegian. The Norwegian price has risen as much as 94 percent since July 2019, and the old owners were extremely diluted debt conversion this spring.
It may look like small savers are investing in high-risk stocks, which should provide a higher return, at least in the long run. But do they do it? High risk here primarily means shares that fluctuate a lot in value and more than the total market in general. The shares have so-called high beta-green, call it a high price risk (see also the fact box below).
– If we simplify and say that the shares with high risk also have a high beta, they should give better results. But empirical research has not been able to prove it. It also shows the figures for Norway, says investment director Robert Næss in Nordea to Nettavisen Økonomi.
He has looked at the return you would have received over time if you systematically bought high-risk shares. It has not been good, something we will give examples of later.
Fact
Indicates how volatile an investment will be in relation to the market as a whole.
The stock market as a whole has a beta value of 1.
If a share has a beta value of more than 1, it means greater risk, but also expected higher returns.
If a share has a beta value of less than 1, it means lower expected risk and return than the market in general.
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He has included all the shares he has had in his systems since January 2010, just over 400 shares. For each of these shares, Næss has calculated the risk over the past 90 days, as well as the share price development each month.
– For each month, I have found the ten stocks that have had the highest risk, and then I have put them in one portfolio. The measured risk is in the period before I look at the return. Then I took the ten stocks with the lowest risk and put them in another portfolio.
Bad
– I then compared the return with the Oslo Stock Exchange. There I find clear results. If you systematically choose the shares with high risk, you get a very good return in some periods, but over time it goes badly, says Næss.
While the Oslo Stock Exchange is up 114 percent since the turn of the year 2009-2010, the portfolio of high-risk shares has fallen in value. In fact, the five stocks with the highest risk during the period fell by a disastrous 83 percent (see graph below).
MONEY OUT OF THE WINDOW: Investing in high-risk shares on the Oslo Stock Exchange in the hope of a higher return has been a total failure. Photo: (Nordea Markets)
During the same period, the shares with the lowest risk rose by 188 per cent. NOK 100,000 invested in these shares ten years ago would have been NOK 288,000 today. Næss says he has made these calculations before, and the conclusion is the same.
– The first time was in 2004, and I have always found that applying for shares with high risk is a trap, he warns.
– But why is it so, high risk should give a higher return, otherwise there is no point in taking this risk? – It is probably due to a combination of the lottery effect and optimism, Næss answers.
FORGET THE LOTTERY SHARES: If you want to get rich in the stock market, you should invest in low-risk stocks, advises Investment Director Robert Næss at Nordea. Photo: (Nordea)
– The lottery effect indicates that we get a lot of pleasure from a real win, while a small win gives us little benefit. Thus, we tend to prefer risky shares even if the expected value is not higher than a “puzzling” share that only gives 7 -10 percent in annual return, he continues.
Næss also believes that it is a high status to be able to tell that you have bought a share that has given a fantastic return. This can lead to too many people putting too much money into risky stocks, so that the expected return is poor.
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Everything will get better
– Another possible explanation may be that one thinks if I first take on the risk of investing in shares, I do not bother to buy shares that will rise 8 percent. Then I will spend the money on the shares that really hit.
By far the worst has been in debt-laden Norwegian (see graph below) and in the electronics company Thin Film, where virtually everything has been lost.
POPULAR, BUT DISASTER: Norwegian was a popular stock, but the stock has fallen by almost 99 percent in the last five years. Photo: (infront)
In the car parts manufacturer Kongsberg Automotive, you had lost more than 8 out of 10 kroner, in the rig company Borr Drilling 94 out of 100 kroner since the stock exchange listing in 2017.
If, on the other hand, you had invested NOK 100,000 in the “boring” construction company AF Gruppen in June 2015, you would have been NOK 74,000 richer today (see the graph below).
TRUST, BUT GOOD: AF Gruppen may not be the most exciting share, but here you would have earned 74 percent if you had owned the share in the past five years. Photo: (infront)
You would have had 45,000 richer more to go with if you had owned equity certificates in SR-Bank, been 44,000 kroner richer with shares in Gjensidige Forsikring and 32,000 kroner richer with Orkla shares.
The stock market is very much about improvements and becoming a leader. Næss says that in just about every company presentation he has seen in the 30 years he has worked in finance, the companies talk about how much better they will be.
– I have yet to hear that the companies say that we have had some luck in recent years, and that they will now assume lower earnings in the years ahead. A business leader must also be optimistic, Næss points out.
– It was well liked, but what else could he have said? If he said that Porsche and the other electric cars that come are fresher and better than their own, it would be a suicide that meant that customers would not buy Tesla either.
And this week, the classifieds company Adevinta made a big purchase when they took over the classifieds business for eBay. They were to become world leaders. The hydrogen company NEL will become a world leader in its segment, etc.
– For an investor, it is easy to be blinded by this optimism, and it is very easy to put too high a probability on the positive outcome.
Demanding
The experienced investment director says that it is demanding to invest in shares. Over the years, he himself has received many prospects to decide on.
– When you are presented with a project or share, the focus is always on how good it will be. There is a tendency to look at oversized targets, such as Tesla producing 20 percent of all cars in the world. Then you add a probability of such an outcome. Many people there have a hard time setting the right probability, Næss thinks.
He draws a parallel to “betting”, betting. Now the Democrats’ presidential candidate Joe Biden is the favorite among the bookmakers. If you bet NOK 13 on Biden winning the presidential election in November, you will currently get NOK 21 back if you hit.
– If you put 4 kroner on Trump, you get 11 kroner, so now Biden is the favorite. But what’s really my point is that you can bet on Hillary Clinton, and then you get 66 kroner back. As many as 66 times the bet! emphasizes Næss.
– There is a great potential, but it is also just nonsense. She is not a real candidate, so here you are throwing away the chances. When it comes to stocks, it is probably not as obvious to find the unreasonable probabilities. This means that too many people pay too high a price for lottery shares, warns Nordea’s investment director.
Næss has also looked at the shares that Nordnet Livsforsikring owns. Nordnet has many small savers, so they can be a mirror image of what many small investors invest in. The clearly largest share in the portfolio is in the hydrogen company NEL, followed by the biopharmaceutical company PCI Biotech and the gaming company Kahoot!
– Almost none of the companies in Nordnet’s portfolio have earnings, they make up only 6.6 per cent of the total investment. This shows that small investors go for lottery shares, says Næss.
