Other HL Menckens often paraphrased quote that nobody went broke underestimating the intelligence of the general public. The real lesson from such things lies in what they tell us about investors and group behaviour. What initially piqued my interest in this little phenomena was the sense of permanence people attach to events that are transient. Having lived through the 1970’s I experienced, flared jeans, string art, pet rocks, yo-yo’s, platform shoes, disco and permed hair. All of which were supposed to be permanent. Impermanence is the natural state of the majority of social fads – it is also the natural state of financial fads. Markets move constantly as investor perceptions and emotions shift.
When thinking about this piece I snipped a section of news headlines from Google which are shown below. What is interesting is the vehemence in the conviction that the Pokemon craze is over and that the shares had been smashed. Apparently it appeared to those writing the articles that Nintendo was obviously about to be placed into receivership. What you see below is an example of disaster myopia, commentators seem perpetually surprised by what are natural movements or events within markets and each of these occurrences have to be greeted by breathless hyperbole forecasting the end of the world.
The calls of calamity were something I heard everywhere I went yesterday and for some reason it seemed to be a major news headline that was repeated over and over even whilst I was at the gym. So is it was simply a matter of going to the data and seeing – the chart below shows a different picture.
Point 1 – News is Bullshit
What can be seen from the chart is a reasonably normal reaction to a ballistic move. In any strong move you are going to get investors who seek to cash in. Nintendo had been drifting down and then consolidating for the better part of a year and undoubtedly there were investors locked into this downward grind who saw this breakout as their way out. This is completely understandable. In addition to this there will have been those who got involved in the stock as it broke out and in my view they have quite sensibly decided that racking up a 100% gain in a few trading periods is not too bad and it might be time to lock some of that in. Again this is a natural response, any move has a variety of participants with a variety of motivations. Eventually the market will decide upon the dominant motivation and price will move accordingly.
Point 2 – Thinking explains most things.
As the price retraces it will be interesting to see how many investors believe that the stock will continue to make 100% per week. It is not hard to imagine them sitting there doing a quick bit of mental arithmetic. If the stock goes from 15,000 to 30,000 in a week then in a year it will have gone to a number that it too big for my calculator. In many ways people believe that they have a long term relationship with a stock that should continue on a linear trajectory. Very few things in life are linear other than the relentless advance of human stupidity fueled by social media.
Point 3 – Just as Safari suits were unsustainable for the sake of good taste so too is ballistic share price growth.
When presented with a situation people often fall into one of two camps. For example with the Pokemon craze people either think it is the best thing since indoor plumbing or you think that no sane grown up in the world should be traipsing around in the middle of the day looking for made up images on a map in the vain hope of scoring points. Each side will have a raft of arguments supporting their view and whilst individuals might have a more nuanced view about this craze. For example those in support of it might simply regard it as a bit of fun that gets people outside, socialising and generally just mucking around with mates. Those who think its a bit dim for adults to be doing this sort of thing will as individuals probably regard it as stupid but harmless. The group view of of advocates and opponents will be totally different and undoubtedly more polarised. The adherents will think that the craze is something their grandchildren will be doing whilst the opponents believe it is the downfall of civilisations as we know it.
This group polarisation is also a market phenomena and is reflected in the statements people make about a given vehicle. Refer back to the news items regarding the slip in Nintendo’s price and look at the language being used. It lacks any form of nuance or subtlety, it is designed to cause reaction as is the language of those who believe that this is the dawn of a new golden age for both Nintendo and augmented reality games. In reality the world is much more nuanced and as traders you have to navigate your way through both the language and the impact of the language upon markets.
Point 4 – Groups are generally stupid and extreme whereas individuals can be surprisingly sensible.
If you refer to the chart of Nintendo the recent rise seems to have a look a familiarity to it. That is because it is an archetypal breakout – a period of congestion, followed by a price shock and a lift in volume. What is of interest is that as the price broke out many will have sold their holdings in Nintendo and some would have undoubtedly gone short. The question is why in the face of evidence would you act counter to what you are being told by the market. The answer is in part that all moves have many participants with many motivations. However, some of those motivations are simply wrong and are based upon either a flawed narrative, ego or just stupidity. Markets are simply voting machines and price and its direction is the mechanism by which it makes it decision known. Contrary to popular belief it is never wrong in its judgement.
Point 5 – The market knows everything and will tell you if you just listen.