The Full English Accompaniment – Uncoupled from earnings expectations

I wish I had bought into Tesla in March. So does everyone who didn’t. Well… most people. From a low of $361, it’s now up around $1,500. I seriously considered it, but stuck to my portfolio plans, and have now missed out. Meteoric doesn’t quite cover it.


Image Courtesy of Google Market Summary

So I missed out, and I’m disgruntled. Fear Of Missing Out, FOMO, has been cited as a major reason for moves in the Nasdaq over the past few months. Entitled millennial’s wanting to not miss the bandwagon with their US stimulus cheques, so the trope goes. There’s a nice piece in this week’s Wall Street Journal (1), demonstrating that FOMO ain’t a new thing. From the tulips to the South Sea Bubble, most generations will get a little FOMO. We tell ourselves we’re intelligent investors, and we won’t get caught up in this hype.

Instead, we will try to intellectualise a position. Tesla does make sense in our head, as well as our gut, because reasons. It justifies a $300 billion dollar valuation, the greatest of all automotive manufacturers, at >60 times it’s earnings, because reasons (2). It’s beating sales expectations, and expanding it’s factories (2). It’s piggy-backing a rise in Chinese EVs, following a move in China towards a predominantly electric vehicle market (3). We must be right, as (confirmation bias) Piper Sandler, a proper legit firm, reckons that Tesla is worth $2,322 (4). We can make it make sense.

Last week I mentioned the TQQQ in my news. For the uninformed, the Invesco QQQ (ticker: QQQ) is an ETF that tracks the Nasdaq 100 index (5). It’s done very well with the rise of tech, thank you very much. TQQQ is a Powershares ETF triple-leveraged QQQ, just in case your risk tolerance wasn’t sated. The QQQs and the Nasdaq are again interesting this week, as following their colossal climb, we’ve seen a short, sharp drop. The options market is looking pretty negative. Valuations have been climbing, creating larger and larger multiples on the price/earnings outlooks. As the earnings come home to roost, there’s bets that the valuations are too high (6).

So, on the one hand, FOMO and other psychological biases and influences are pushing certain stocks higher. On the other, people are betting against these biases continuing, and reality (whatever that is), asserting itself on stock market prices based on valuations.

The Gestalt Market

This is basically the core philosophy of the Efficient Market Hypothesis (7).

“…asset prices reflect all available information. A direct implication is that it is impossible to “beat the market” consistently on a risk-adjusted basis since market prices should only react to new information.” (7)

Either some of the people amongst those on the bandwagon know something the others don’t, and the out-sized pricing is justified, or they don’t, there’s no info, and market forces will re-assert themselves via a fall in price.

This theorem has plenty of criticism laid on it, by lots of big names. It doesn’t account for behavioural psychology. It doesn’t account for the various anomalies caused by small neglected stocks, or bubbles. The claims of Paul Samuelson, that the market is “micro efficient”, not “macro efficient”.

As I’ve been slogging my way through The Intelligent Investor, a comment from Benjamin Graham has laid this bare:

“Corporate accounting is often tricky; security analysis can be complicated; stock valuations are really dependable only in exceptional cases.” (8)

If corporate accounting in the ’70s, when Ben Graham wrote, was “tricky”, corporate accounting in 2020 is downright shady. My mate is effectively the CFO of a moderate SME. He’s an honest man. He’s spent the last three years tearing his greying hair out as he uncovers deeper and deeper accounting errors by his predecessor and relays them to the owner. How many companies out there are sitting on mis-carried noughts and odd write-downs? This is stuff the market cannot know.

Instead I find myself thinking of the market as the sum of all knowledge and cognitive biases. The sum of wisdom and collective financial thought. Not just knowledge, but also hunches, gambles either way, suspicions and beliefs. You can gamble for or against Tesla or TQQQ. There is likely to be someone out there doing the opposite. Given money and investment follows interest, science imitates and replicates art, we end up at the sum total of belief. We may like to intellectualise and make the company financial data (the science!) echo or challenge the news, but ultimately that is our own bias. The gestalt market doesn’t care. Your beliefs are gristle to it’s mill.

Have a great week,

The Fire Shrink

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Blogs/ Opinion:


  8. Benjamin Graham. The Intelligent Investor (Revised Edition). 2003. Chapter 12, page 318.

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