Caution investment hype. Bubbles? Pop?
Written: 14 September 2022
Author: Kirsty O’Hara
3 min read
‘Crashing’, ‘Plummeting’, ‘Bubbles’, ‘Dumping’, ‘Impending’, ‘Dire’, ‘Imminent’, ‘FOOP’ - are just some of the words you will see cross your eyeballs when living in today’s overhyped media driven world.
And while these words are not in themselves bad, this article gives you permission to avoid reactive behaviours when you see them. Our key message today is:
Before reacting to an investment situation, always assess the true sentiment of a message and avoid herd panic.
When making any investment decisions, regardless of whether that is buying or selling investments, always aim to: avoid hype, do your research and consider the following tips.
Tip #1. Read beyond the clickbait title
First up, let’s give journalists a kind pass. If they have over sensationalised a headline, they are just trying to do their job. The media crowd put food on the table by producing content that people open and read.
The headline itself may be designed to get the click, however we urge you as the ‘clicker’ to remain open minded and actually read the content of their article; because sometimes when you dive a little deeper into any particular media message, you may find it to be less dire than you think.
Regardless of whether you agree, or disagree, with content you are consuming - we urge you to consider more than one source and do your own research to inform your investment decisions.
Tip #2. Question who profits from this content?
We invite you to think about the source of any hype - be that in traditional media, tweets and social, conversations you overhear, or banter around the water cooler at work.
When your eyes or ears are taking in information about investing, do take a moment to wonder if the original source of that information will themselves profit, in some way, from humans panicking and reacting accordingly? This could be in the form of either rushing to buy, or rushing to sell an investment product.
An example of a herd ruffler might be Michael Burry, of Scion Capital Management, who is well known for betting on the 2008 property bubble - famously chronicled in “The Big Short” movie. While we may be in awe of Burry’s astute eye and conviction for spotting a bubble, we need to raise caution to potential motive’s behind Burry’s recent tweets and any media circulation of his market commentary. As the movie title may suggest, Burry is a renowned short seller. This means he often bets on markets dropping, and therefore if markets do drop it can potentially play to his advantage.
Investopedia explain that “In short selling, a position is opened by borrowing shares of a stock or other asset that the investor believes will decrease in value. The investor then sells these borrowed shares to buyers willing to pay the market price. Before the borrowed shares must be returned, the trader is betting that the price will continue to decline and they can purchase them at a lower cost. The risk of loss on a short sale is theoretically unlimited since the price of any asset can climb to infinity.”
Investopedia’s key takeaway’s on short selling include:
- Short selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money.
- Short-sellers bet on, and profit from, a drop in a security's price. This can be contrasted with long investors who want the price to go up.
- Short selling has a high risk/reward ratio: It can offer big profits, but losses can mount quickly and infinitely due to margin calls.
If you want to really deep dive into the details of short selling, click here to read the Investopedia summary.
Burry’s followers will likely know he is renowned for writing sensationalised tweets, which he often deletes after posting. If you have followed any of his commentary your heart may have skipped a beat to see him apparently ‘dump his portfolio’ and say ‘the mother of all crashes is coming’.
This is a great example of someone who may profit from someone reading a tweet, and then reacting without further research.
Tip #3. Avoid herd panic
In real life it’s easy to see that if folks like Burry can ruffle enough hides, the herd will likely panic. His forecast may then become a reality if people do sell in a mad rush, which has the helpful domino effect of making his prophecy appear true.
If you’re thinking ‘yeah, that’s all well and good. But what if he is right?’ we urge you to do your own research and consider point #2 above. Please note, Burry has recently been wrong numerous times with his speculative comments made via twitter and media (over the period from 2017 to 2021).
With more investors entering the markets it will be interesting to see how herd behaviour pans out in the years to come.
Tip #4. Beware investo-inflationary hype
On the flipside of ‘shorts’ hype, and messages attempting to drive panic sells, we also have hype from people who profit from wanting everyone to get ‘in on’ an investment. In accordance with typical supply and demand models, if there are more buyers than sellers, it drives the price of an investment UP in value.
This type of hype may be innocent in nature - but not uncommon amongst retail investors wanting to rally other investors to join them, and in doing so feel reassured they have made the right investment decision - which by way of this hype may generate popularity towards an investment that in turn inflates their own personal holdings. They may be sincerely excited about a particular offering, and not be intending to generate herd panic, but innocently wanting to inspire others to buy an investment. On the flipside of this, they also don’t want to be the only person at the party - and as a result may be wanting to rally the herd to join them by investing alongside them.
When operating from a place of FOMO (fear of missing out) it’s easy to fall prey to an enthusiastic holder of crypto or stocks wanting us all to ‘get in on the game’. In these situations, we may hear hype that motivates us to rush to buy investments. You may be tempted when overhearing conversations in bars, or around the work watercooler. You may hear ‘it’s a sure thing’; or be tempted by how much someone else has ‘made’ on the markets – with investments such as crypto rising (or more recently falling) at rates that are hard to fathom.
This is where the tried-and-true saying ‘if it’s too good to be true, it likely is’ comes into play.
Before buying any investment, especially when you can feel FOMO nagging at your wallet, be sure to check you have done your due diligence. Always make sure you are buying because that investment fits with your long term financial goals and investing strategy; and make sure you are comfortable with any risks associated with that opportunity.
Tip #5. Know your why
Simon Sinek made this concept popular in business, however it holds just as true when considering investments.
Research suggests that people are more likely to jump on high risk, and hyped investments, when they are feeling a sense of desperation and wanting to either get rich quick or find a way out of a financial situation. In many cases speculative investments can make your financial situation worse (if you are relying on hope and optimism to get the returns you need).
Always know why you want to buy an investment, and for how long, as this may help you to steer clear of any decisions driven by hype.
In Conclusion:
Any financial decisions you make are up to you. Unless you are a short seller, it would generally be wise to take investment related media hype with a grain of salt. You can always use any investment hype to prompt you to re-examine your current holdings and investment strategy.
If you’re not sure about your investment strategy, it could be good to either talk to a financial adviser or read up and boost your understanding of how investments work. The following four articles could be a helpful starting point, if you are curious about ways to begin selecting investments that are right for you:
- Navigate investment choices like a pro – 9 areas to explore (click here)
- DIY Investing? Insights can help (click here)
- How to read a RIPPL Effect report? (click here)
- Building a nest-egg? (click here)
Happy hype-free investing!
Flint
IMPORTANT NOTICE AND DISCLAIMER:
All content shared is of a general nature, current to the time it was penned, and is not financial advice. Before making any investment decisions, please be sure you have completed full due diligence. This should include reading the product disclosure statement (PDS), considering fees and taxation, identifying your time horizons, and understanding the performance history and reputation of the investments you are considering.
Please note: When investing you are not guaranteed to make money (and on occasion you may lose some or all of the money you began with). Seek independent advice to establish if an investment is suitable for your financial situation and long-term wealth generation goals.
Sources:
https://nypost.com/2022/08/15/michael-burry-dumps-stock-portfolio-after-market-crash-warnings/
https://finance.yahoo.com/news/10-times-michael-burry-market-182700564.html