Behavioural Finance and the Rise of ‘The  Herzfeld Carribean Basin Fu (CUBA)’ Shareprices

Investors in a tiny American fund have received an extraordinary windfall, apparently as a result of the four-letter symbol used to identify the fund on the US stock market.The fund, called Herzfeld Caribbean Basin, has stakes in a number of companies that could benefit from last week’s decision by Barack Obama to restore relations with Cuba. But the bulk of the rise in the fund’s share price seems to be due to investors being drawn to its four-letter code or “ticker” symbol: CUBA.

(Worstall, 2014).

Whilst partly amused, I am amazed at investors failure  to research appropriate information into the company before risking their capital in a firm based on the ticker symbol ‘CUBA’. Such an anomilie in terms of share price behaviour in a supossedly efficient  market could be put down to ‘behavioral finance’ identified by Wastson & Head (2010) , which suggests: 

‘that investors do not appear in practice to be consistently able to make decisions that have as their objective the maximisation of their own wealth.’

When analysing the change in The Herzfeld Carribean Basin Fu shock price it can be clearly demonstrated the dramatic effect that US restored relations with Cuba initially had upon its perceived worth (Figure 1). However as research by Sam & Smith (2007) found ‘once given creditable signals regarding a securtiy’s value they quickly adjust their beliefs and correction occurs’ (Figure 1). Even though the value of shares in the company is still higher than before the Obama announcement, this could be a more accurate and credible valuation the company’s ‘stakes in a number of companies that could benefit from… [the] … decision by Barack Obama to restore relations with Cuba’.

(Adapted from: Yahoo Finance, 2015).

Despite the fact the market appeared to move rapidly from a state of irrationality to a state of rationality, I find it interesting that in an age where so much pressure is put on companies to deliver accurate information to investors regarding their stock’s worth, and thus helping to achieve stronger market efficiency, that ‘behavioural finance’ can still produce such large - although brief - failures in the current stock market.

References

BBC (2014, December 17). Obama hails 'new chapter' in US-Cuba ties. BBC. Retrieved from http://www.bbc.co.uk/

Small, K. & Smith, J. (2007). The hot stock tip from Debbie: implications for market efficiency. The Journal of Behavioural Finance (8)4, 191-197.

Watson, D. & Head, A. (2010). Capital market efficiency in Watson, D. & Head, A. (Ed.5) Corporate Finance Principles and Practice. (pp.36-42).

Worstall, T. (2014, December 24). Cuba Shows That The Efficient Markets Hypothesis Is Wrong. Forbes. Retrieved from http://www.forbes.com

Yahoo Finance (2015). The Herzfeld Caribbean Basin Fu (CUBA). Retrieved from https://uk.finance.yahoo.com