The buying and selling of many stocks has a lot more in common with the shopping frenzies of this past weekend than most people fully understand … or care to admit.
It’s interesting and instructive to think about the equity markets in the same way that we think about retail marketers like Apple, Toys-R-Us and Abercrombie & Fitch.
I first came across this idea of the stock market as an “inventory” based business in an old book by an ex Wall Street insider, Richard Ney. The name of the book was The Wall Street Gang. Ney wrote in the preface of his book:
“The only difference between the New York Stock Exchange and a dictatorship is that the dictator confiscates your money outright whereas the New York Stock Exchange merely says you’ve made a bad investment.”
It wasn’t exactly a ringing endorsement of Wall Street.
Ney made the case that which stocks get pushed on the public is largely a question of what stocks the brokers and market makers have in “inventory” to sell. Just like t-shirts in a clothing store, the stocks that are filling up the inventory shelves and that “need to be moved” get put at the front of the store.
I’ve found it to be a useful way to think about the stock market ever since. I’ve spoken to more than one ex-stock broker who confirmed that this “inventory” metaphor has a lot of truth in it.
I find that the metaphor helps me to take a step back from my “first impressions” of stocks that catch my interest and encourages me to dig a little deeper into the reasons why a stock is suddenly showing up on the public’s radar.
I was reminded of this “stocks as a retail inventory business” idea by an article I read on MarketWatch this weekend – “10 retail tricks that make you spend more.” In the article the authors identify ten different tricks that retailers use to get us to spend more money than we might have otherwise intended.
Market structures have certainly changed since Ney’s book was published over 40 years ago. The hawking of common stocks is no longer the exclusive domain of stock brokers. Nowadays, the media play a big role in deciding what stocks get brought to front of the store, as do the investor and public relations groups of the public companies themselves.
But, as they say … the more things change, the more they remain the same.
Let’s take a look at a few of these “retail” tricks and see how they might also be at play in the stock market.
They treat you like a close friend …
Robert Cialdini, in his book Influence: The Psychology of Persuasion calls this technique the rule of reciprocation. When someone gives you something, you naturally want to give something in return. You want to reciprocate. Right?
Retailers need you to relax a bit … to open up. When a store clerk engages you in small talk, maybe even disclosing something personal about himself, it’s very likely a technique to get you to engage and reciprocate by disclosing something about you.
I notice this all the time with telemarketers that call me. The conversation typically starts out by them asking how I am.
I always cringe a bit when I hear myself reciprocate and say, “How are you?” I know that’s exactly what they wanted me to say. Now they’ve got me where they want me. The relationship is established. It’s harder to hang up on them.
When someone needs to sell something at a price that might not be fully justified, the reciprocity rule is often in play. That’s certainly the case in financial services, where everyone seems to want to be your friend.
Maria Bartiromo is definitely on my side. Isn’t she?
They sell you a reusable bag, featuring the store’s logo.
“Hey … we love the environment too! We’re good guys.”
What on earth do polar bears in winter scarves have to do with Coca-Cola?
They price everything one cent short of a whole number
It’s hard to believe that we get influenced by the difference between $9.99 and $10.00 but the studies are pretty conclusive that there’s a method to the madness.
Investors are often influenced by the prices of individual stocks as well.
Nowadays it’s become fashionable to have shares priced in the hundreds of dollars, like GOOGL at $770 per share and TSLA at $230 per share.
Few numbers in this world mean less than the price per share of a common stock. It’s mathematically absurd to look at the price per share and conclude that the stock is “expensive” or “cheap”. The very fact that stocks are quoted in price per share is borderline criminal.
Why aren’t stocks just quoted in price to earnings ratios? Then every time you saw a stock quote you would say to yourself, “That’s how many years it will take me to earn back my money based on current earnings.”
The tradition of giving stock quotes in terms of more or less meaningless numbers leaves an awful lot of room for perceptual manipulation.
So this holiday season, have some fun by keeping an eye out for how marketers do their best to get you to open up your wallets more than you might have originally intended.
Question everything … including how you decide which stocks to buy … and how much you’re willing to pay.
To keeping more of what’s yours,
Richard M. Smith, PhD