Without a doubt being a genius helps, in all things. Studies show a correlation with a longer lifespan and higher quality of late-stage life, even less injuries. However, it has not been shown quantitatively or subjectively (see Jack Schwager’s Market Wizards) to provide any consistent edge in the marketplace. Personally I find this equalizing feature of the markets one of its most attractive and fascinating features. All it takes to lose or win is being completely confident in what you think you know.
Take this year for instance, the start was meteoric, the bullish drums drowned out every cautioning voice with their reverberating and quaking ATHs. Then, all at once, the markets slipped and the music skipped a beat – everyone stopped dancing, the smartest guys in the room were suddenly seen conspicuously close to the exits. We all paused for about a week and slowly resumed dancing to another ascending rhythm – the beat maintained.
This short period was painted with significant and new market information that caused realignments of prophecy, as is always the case some of this information made contrarian traders give pause while a majority didn’t. The event this article will concentrate on is one of the more conspicuous news events of the period, the Facebook Cambridge Analytica Scandal.
The scandal had a mixture of several elements, politics, ethics in advertising, emotional betrayal, and of course, market re-evaluation. When the scandal was publicized to the world (March 17th) by the NYT and the Guardian, FB shares endured a serious correction going as low as$149.02 per share. This reaction was purely emotional trading that recovered unceremoniously slowly by BTFD opportunists. A panic remained with the shares and conspicuously manifested at the next earnings report roughly a month later, with the stock dipping from a high of $169.00 (4/17/2018) to a low of 156.19 (4/25/2018). Shareholders were vindicated when the stock jumped to a high of $176.27 on the day after earnings. The earnings were great, they showed a company in charge of their fiscal future, creatively exploiting money making opportunities (The pilfering of innovative features notwithstanding. See $SNAP) and for all intents and purposes looked at the scandal from a rear view mirror.
In the interim between the earnings described above and the next report the stock soared as high as $218.00. The fear (as far as security pricing was concerned) was eliminated. Meanwhile Mr. Zuckerberg was sitting in front of MPs and congress describing the basics of Facebook’s business. Sheryl Sandberg was carrying the banner as well in interviews with media outlets. A tour of apology, but more significantly, a tour of thoughtful business operation adjustments were voiced in these forums, yet the appreciating share price appeared to shrug off the content of the conversation.
To be fair, an analyst shouldn’t take words as fact, so it’s understood why investors would ignore the conversation taking place. That being said, this writer would be willing to place more value on words that are spoken before central planners, than words that are spoken before journalists. If the researcher believes the same, then the inquirer will understand the opportunity that is presented.
As we all know probabilities are never a certainty – anyone that’s ever lost a high value poker hand knows this axiom intimately. But it is an opportunity nonetheless. Provided a security’s price elasticity and violent appreciation, despite crisis levels of negative revelation in the open market, an opportunity is clearly present as you are bearing witness to equity ebullience carrying value – not scrutiny of the underlying. If the buyer (seller) believed that the Cambridge Analytica scandal meant truly nothing, in terms of future value, business operations, user satisfaction, and regulatory exigency (among other factors), then the stock represents a true and efficient value. But if the buyer (seller) believes that the scandal does mean something, effecting either one, or all of the factors above, what remains is the opportunity. I’m unwilling to believe that professional traders believed the effects of Cambridge Analytica were absolved with the earnings report put out a month later, this report did not cover Q1, so it’s immaterial as far as the scandal’s reported effects are concerned.
I want to repeat that noticing and acting on this opportunity is one that will provide no solace to the conservative investor looking for a sure-small thing. It provides no solace to the investor that wants to understand if their current holdings run the same risk. The conclusion (I hope) shows that a reasonable person can act without reliance on the application of fundamental analysis – since the earnings in April depicted robust growth –, instead the analyst could have relied on simply thinking through the events presently occurring, good old fashion research and conviction. The greatest error (thanks to hindsight) lies in believing that the depicted robust growth would continue, despite scandal, loss of trust, state intervention, change in business operations (that generate the growth of funds investors have been enjoying in the first place).
The price is only right if the market is proven right, analysts should keep in mind, that the market, much like large groups of people, are always re-evaluating and reorganizing.