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The Market Sentimentalist: (Un)Common Knowledge

Imagine if you will the following scenario.

Company A’s Stock price is the best performer within its country’s stock Market year-to-date (admittedly 2017 has only just started, but still).

In fact, Company’s A’s stock price is not just the best performer; it’s the best by a huge margin having risen an eyewatering 930% in three weeks.

(Starting to get interesting now isn’t it! Nothing attracts investors’ attention like price momentum; it is analogous to blood in shark-infested waters.)

At this stage one might begin to suspect that Company A is either:

  • a takeover target
  • has just solved cold nuclear fusion or announced some other outstanding technological break-through
  • is a mining company that has just struck gold (literally or figuratively)

Sensible speculations though they may be, now imagine that none of the above are true. Furthermore, imagine that the management of Company A, mystified as to the recent surge in its share price, issues a public statement explaining that not only has nothing fundamentally changed in relation to its business model, nothing is expected to change. What’s more, for good measure, it states that the equity of the company, which as a result of the stock price jump has a valuation of USD 7mn, is roughly zero.

Ridiculous and as preposterous as the above sounds, this scenario just occurred. A timely reminder that financial markets are not efficient “net present value calculating machines”, but wonderfully irrational beasts comprised of continually shifting numbers of cynics, with their tendency to undervalue assets, and sentimentalists, with their tendency to overvalue assets.

How these crowd dynamics unfold over time is something we have been pondering at length over the past several months, particularly in light of the remarkable shift in investor attitudes following Trumps’ victory. As part of this process we came across the notion of “common knowledge”; a useful concept for investors seeking to better understand and exploit market reversals (using crowd-sourced sentiments, naturally!).

This insight is part of Smartkarma. For more follow this link.

This post first appeared on Smartkarma | Intelligent Investing, please read the originial post: here

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The Market Sentimentalist: (Un)Common Knowledge


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