Twitter birds of a feather, trade shares together
In today’s data-driven communication era, people tend to exchange more noise. This proposition, better known as Priestley’s paradox, is also indicative of the fact that evidence is ignored in the face of a good story. Political campaigns win more on marketing teams that tell stories that showcase personality, rather than the content of the person’s manifesto. This typical public response is interestingly presented in a space where numbers are usually meant to triumph over narrative and sentiment. Human beings tend to fall back into old habits, and markets are no exception.
Markets are simply where buyers and sellers haggle to find a price, whether in Pettah or Wall Street. This price discovery is arguably the most important part of the interaction, as participants can now articulate in monetary terms: what things are worth to them. Assessments should be based on objective research and well-founded assumptions in the forecasts. As researchers develop skills in various methods of technical and fundamental analysis, the agent or broker on the sell side uses them to persuade a trade. Market participants are then free to negotiate.
Recently, with social media, this communication is filtered by an “authority” personality or group rather than a research report, adding noise and blurring sound investment decisions.
This phenomenon is by no means unique to our local markets. At the end of January 2021, the value of Bitcoin increased by more than 20% to reach $38,566 after Elon Musk changed the bio of his personal Twitter account to #bitcoin. This increase was based on the sole speculation that the billionaire had bought more cryptocurrency, sparking a buying frenzy that drove the value of the asset higher. Similarly, r/WallStreetBets, a popular message channel on social media apps reddit and discord, had users rallying around a dying stock company. Gamestop, a video game retail company that had many years of poor performance, saw its value rise to over $24 billion from just $2 billion within days, only to crash afterward.
Sri Lanka has also seen similar action on social media following the surge in stock market interest after COVID-19-related shutdowns and working from home. A cohort of new retail investors, eager to win big, may have turned prematurely to Twitter and WhatsApp groups; continue on the small wins over the bigger losses that continue to be described as those that “can be won back”. This is where the problem lies. Just as a democracy would flourish with a well-educated electorate, a market works best when its participants are informed and understand the risk, instead of rolling the dice on equity investments.
In order to gain some market exposure with limited trading knowledge or resources to track, monitor, and optimize a portfolio, there are several forums organized by the SEC and CSE. Online investing courses are very popular and affordable to entice anyone willing and able to invest; while mutual funds, locally called Unit Trusts, exist for busier people.
Making an informed decision is key to navigating a market and avoiding losses. What most participants don’t realize is something the Securities and Exchange Commission, to their credit, is pretty clear about: past performance is not indicative of future returns. Therefore, even the winners of a bull market may not withstand the heat of the downside, only to see the next one.
One cannot simply criticize Musk, the WallStreetBets subreddit, and any other market guru with their elaborate claims. An individual, social media group or research house for that matter acting in their best interests – given access to information, level of authority or advice they give – cannot even necessarily be held by a regulator for committing a breach of the market. Market participants are ultimately responsible for the transactions they make with their capital. All ratings have a margin of error because no one has a crystal ball to see for sure what the future holds.