What is the big lesson from June’s so-called tech wreck? Simply, when mass media gets too hot and heavy on some newfangled angle, it is much more likely to be a short-term blip than a long-term trend.
We’ve seen this movie before. Recall the “flash crash” of 2010? Or the “taper tantrum” in 2013 as markets feared the end was nigh for quantitative easing? More recently, China has provided the drama, with the Chinese exchange rate obsession in 2015, and fears about stock market circuit breakers in the early part of last year. All were a flash in the pan. Media harping huge on brand new phenomena usually fizzles fast — within weeks, if not days.
As I have written here before, I am a fan of tech stocks for the remainder of this long bull market. Backers of bull markets love tech. As I write, the tech sector is bouncing. Maybe that will continue, or maybe it will dip again. Either way, evidence says it is a blip — not a tradeable trend.
How do we know? A month ago, everyone outside the City and Wall Street thought a “fang” was tooth, maybe from a snake or spider, not an acronym for Facebook, Amazon, Netflix and Google. But after big tech stocks plunged on June 9, everyone knew markets were getting Fang-ed. The acronym changed to FAAMG two days later, when the sell-off extended to Apple, and Netflix traded places with Microsoft. But the louder and faster funky acronyms become front page verbs, the more likely you want to ignore the hype.
Why? It’s Efficient Markets 101 — a pre-pricing issue. Markets discount all widely known information. By the time the mass media shrieks about a market trend, their sources have almost certainly bought and sold it into relatively profitless oblivion.
The traders media quote usually aren’t altruistic. They will spout about what they just traded, but not what they’re likely to trade soon. Tip your hand before you hit “buy,” and you lose your edge. Traders always move fast and far for their own benefit before taking time to enlighten journalists. And the lag between their tip-off time and when you read that article can be long. After the journalist gets the quote, they must write the article, get it edited, and then published. Several hours, if not a day, in which a million other investors with the same opinion likely traded on it. Less surprise power.
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Big-time bandwagon jumping is a hallmark of quick, quirky swings. Bitcoin is a text book example. Search Google News for “bitcoin” and limit the date range to June 8-9, when the crypto-currency peaked after gaining 167 per cent in less than two and a half months. You will see a bunch of articles headed “How to buy bitcoin” or “Here’s what you’ve missed by not owning bitcoin” and liberal use of pie-in-the-sky forecasts.
These articles are not limited to niche tech or currency trading websites, but appear in local newspapers, read by normal people. The next week, bitcoin fell about 25 per cent in four days, and everyone hopped on the “bitcoin stinks” train. If you swallowed the hype, you could easily have bought bitcoin at $2,800 then sold it near $2,000 (a week later, it was above $2,700.) Chasing your own tail would be more productive and less costly.
Long-term trends don’t tend to suffer from these huge swings in sentiment. That is why they endure — the lack of coverage preserves their surprise power. Back in 2000, there was no “US leading indicators are swirling the drain” bandwagon. Hence few fathomed a recession destroying flimsy tech firms in 2000-01, never mind one of history’s worst bear markets.
More recently, as oil slid in 2014 and beyond, there was no hype machine declaring “US shale producers will keep flooding the market”. No crash warnings for ConocoPhillips, Royal Dutch Shell, Anadarko, or Halliburton. Then the party bus zoomed the other direction, carrying the “Buy energy now!” crowd after OPEC’s much-ballyhooed production cuts deal in November 2016. They probably felt good when the energy sector finished 2016 on a tear.
But unloved shale firms kept drilling and adding rigs, enabled by new technology gains most folks don’t appreciate to this day. They are still profitable at $50 a barrel, so why not drill? Thus the supply glut endured, and energy recently coughed up all its 2016 gains and more. Down 11.1 per cent year to date in sterling terms, it is also the world’s worst sector.
Now, I am not saying that retail investors should not consume media. If I thought that, I wouldn’t be writing here. You must. But understand that the point of reading media is not generally to find actionable investment ideas. What everyone talks about will always be pre-priced and hence largely untradeable. Read the media to see where the bandwagon is rolling, where sentiment is strong and weak, what markets may and may not have priced in — so you know what not to do. That is how you keep from getting fang-dang-doodled.
Ken Fisher is the founder and executive chairman of Fisher Investments and chairman and director of Fisher Investments Europe. Twitter: @KennethLFisher