What can go wrong with investment decisions? 1. Your call may be right but the timing may go wrong – this can prove to be the difference between profit and loss. 2. The market may not move in line with fundamentals. Mass psychology may exhibit irrational exuberance or pessimism.
What do these two risks have in common? The rate at which information gets absorbed in asset prices. What is one of the biggest modern-day, global, humanitarian crises that we face today? Distortion of information!
As I write this in 2020, social media has been around for ten years – that’s how experienced these companies are with identifying vulnerabilities in the human psyche. The currency of the information age is our attention and that’s not necessarily aligned with delivering facts and the full picture.
I see four major issues here – 1. Increasing clickbait at the cost of value. 2. Active disinformation campaigns now run globally. 3. I read this brilliant line somewhere that “if you torture the data long enough, it will say anything”. Thanks to network effects, misinformation or incomplete information gets amplified. 3. Algorithms are used to manipulate what information we are exposed to.
So how does all this tie-in with investing? If you don’t have the full picture, you may end up making sub-optimal investment decisions. If many people do that, it moves the market in a way that is divorced from fundamentals and reality. You also need to take into consideration how the market is interpreting and reacting to the news while making your investment decisions.
Let us take a contemporary example – After reports came out on the Moderna and Pfizer Covid vaccine efficiency, the US and Indian stock markets hit all-time highs. The headline being broadcasted across social media: “Moderna reports its Covid-19 vaccine is 94.5% effective”. The market is behaving as if everyone has been vaccinated, Covid has been eradicated and the world will now revert back to normal in a flash.
Here’s some additional considerations:
- The vaccine announcements could have been timed for insider share sales. They may not necessarily be ready for dispatch. Also, the timeline could extend so far as Q4 2021, given that refrigeration and mass-administration worldwide are not a small problem to solve.
- The vaccine may not be perfect, and it can take time for the immune system to become ready to protect us and translate into herd immunity.1 Social distancing and wearing masks will continue to be of importance.
- M-RNA vaccines have never been mass-administered to human beings before. If the virus evolves by the time the vaccine becomes available for administration, it may render it ineffective.
- “COVID-19 outbreaks at US mink farms raise alarm after mutant strain spreads to humans in Denmark”2. Even if this particular mutant strain is not harmful, the possibility of mutation is a real risk.
- COVID case statistics are worsening, we have crossed 130k+ cases per day in the US, exceeded +9k global deaths per day, last week (all-time high on 21st November 2020 of 9798 deaths)3.
Is it possible that things will get worse before they get better and the market has not discounted that? The global stock market size is inching towards 111% of global GDP right now. Is it possible investors are finding any excuse to invest in stock markets because they expect depressed bond yields? Could it be that the level of risk that an average investor is taking on is disconnected from the reality of the path of the vaccine – despite the positive news? The market is betting aggressively on further stimulus and that the vaccine will solve everything at this point. Also, we are yet to absorb the implications of the great debt unwind.