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OPINION

The Mystery of Aim

The Mystery of Aim
June 23, 2015
The Mystery of Aim

 

FTSE Aim value versus performance

  

While the value of the Aim market has soared, the total return has been extremely poor (please note that our graph only goes back to 1998 rather than Aim's 1995 launch due to the data we have available). Should the poor returns be putting investors off from welcoming new Aim share issues with their hard earned cash? The growth of Aim becomes even more puzzling when reading an excellent article in the FT Money section over the weekend by Claer Barrett, a former IC journalist and now editor of FT Money. Her observations are based on findings by London Business School academics Elroy Dimson and Paul Marsh.

 

 

At 1.4 per cent, the chances of backing a 10-plus-bagger on Aim are fairly poor. You have a far better (30 per cent) chance of losing 95 per cent of your money. And the chance of seeing your investment fall in value is very strong at 72 per cent. So why do investors continue to pour money into Aim's new issues? Could behavioural finance have the answer?

Studies by psychologists show that our minds have a propensity to over-exaggerate the occurrence of the most attention-grabbing events we observe - think of Asos turning £1,000 invested at its 2001 Aim float into £162,000 now. And by definition it is Aim's success stories that are more likely to attract our attention as they become large and important companies that are hard to miss compared with Aim's failures that quietly disappear. As Nobel prize winner Daniel Kahneman puts it in his book Thinking: Fast and Slow, "overconfidence is fed by the illusory certainty of hindsight".

Furthermore, the human mind has been shown to have excessive regard for its own abilities at rational thinking. The book Nudge: Improving Decisions about Health, Wealth and Happiness by Richard H Thaler and Cass R Sunstein cites a questionnaire given to students before starting Thaler's classes in Managerial Decision Making. Asked where they expect to fall in the distribution of grades in the class (based on deciles), typically less than 5 per cent of students say they will be in the bottom half of the class and more than half expect to be in one of the top two deciles - clearly an impossibility.

In the case of investing in Aim, these observations made by behavioural finance experts suggest we all have a natural tendency to think of ourselves as the ones that will alight on the 10-baggers while avoiding the losers. What's more, that's likely to be combined with a natural tendency to think the chances of a 10-bagger are far higher than 1.4 per cent. Most people probably also think the chances of losses, especially 95 per cent losses, are far lower than 72 per cent and 30 per cent respectively.

None of this is to say there is not money to be made on Aim, but it is likely to prove harder than most people would expect at the outset. At least, that may be the message from our chart: the rise in value of Aim despite its distinctly muted performance.