The ‘Onion Phenomenon’

 

 

 

Jayant Pai |  jayant@ppfas.com

You may remember that onions had hit a price of Rs. 70 per kg. during the first quarter of 2011. As they became more and more unaffordable, consumption fell steadily. The ensuing hue & cry and the fears of a political backlash motivated the powers-that-be to act swiftly. Consequently, within a few months, the prices were down considerably. 

However, I noticed that when prices came down from Rs. 70 to around Rs. 58-60 per kg., consumers began purchasing onions in larger quantities than usual, fearing that prices would sky-rocket again. However, as they fell further to around Rs. 25, the frenzied bout of over-stocking subsided. Today, with prices ruling at Rs. 12, onions are being treated just as another essential vegetable which is purchased as and when the need arises. In other words, the memories of the past seem to have faded.

A similar trend is observed in the stockmarket. When we were falling for the past one year, many investors were either dejectedly selling a few stocks in their portfolio or waiting for that “one pullback” to sell. Sure enough, since the market began rising in January 2012, they have only been increasing the cash component in their portfolio by selling on every rise, quite akin to the ‘Onion Phenomenon’. It is very likely that if prices keep rising for the rest of 2012, these same investors will forget 2011 and may once again purchase the very stocks that they are selling today.

In both the above instances, the protagonists display “Recency Bias” wherein they act on the belief that the trend displayed in the recent past will continue for a long time (if not forever) and any change in the trend will not sustain beyond the short term. However, as time goes by and the counter-trend gathers momentum, they again believe that this will go on forever.

Contrarians may actually be buying onions (or onion futures contracts if available) since consumers are pretty apathetic currently and any adverse news regarding the monsoon may drive up the price again.

They may also be buying stocks, seeing that the clouds of gloom in investors’ minds have still not lifted although stock prices are well off their recent lows. They will hope to sell their holdings to these very investors one year down the line when they will begin buying with the “strong belief” that the bull run is here to stay…

You may also like to read “Investing Tactics Knowing Your Onions.

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