Narratives versus numbers (echoes of the Nifty Fifty)

Statistics over stories – with Stephen Moriarty

We all love stories.

Words that describe emotions can teleport us into the world depicted in the tale, and this can lead to a form of ‘neural coupling’ with the storyteller.

Investors are also naturally drawn to narratives or stories:

The current frothy environment appears to have a particular accord with the dotcom boom/bubble of the late 1990s.

The patterns repeat.

Even before the internet craze there was the famous ‘Nifty Fifty’:

The problem with piling into what’s popular is that even the greatest companies in history can turn out to be rotten investments if you pay too much for them:

The ‘Nifty Five

Recently the so-called ‘FAANG’ stocks have soared and together are valued at around US$6 trillion:

Here’s another look at the recent explosive performance of these ‘Nifty Five’:

In May the US employment-to-population collapsed to the lowest level since 1948, with more than 47% of the population not working.

Overall stock market earnings have been battered even more than we feared they might at the beginning of the year, and with new COVID-19 cases in the US hitting fresh daily highs a full recovery is likely to be years away.

Current narratives

The current narrative is that earnings don’t matter too much for stock markets due to low interest rates and the size of the policy response.

In an echo of the tech wreck, thousands of new retail investors (in truth speculators) have come pouring into the market, many of whom have been buying shares in bankrupt companies, hoping to buy for $1 and sell for $2 (known as the ‘greater fool’ theory).

Here are a few of the other current narratives:

In the short term narratives drive market sentiment, but over the longer term statistics will tend to serve you better.

Update: a basket of 90 internet stocks is now valued at an outlandish 160x earnings.

Unfortunately, the numbers tell us that this won’t end well.

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Published by petewargent

CEO Next Level Wealth, & AllenWargent Property Buyers, with offices in Sydney, Brisbane, & London. Leading Australian market analyst, & 6-time published finance author. For more see: Qualifications including: B.A. (Hons.) Industrial History, Chartered Accountant (FCA), Diploma Financial Services (Financial Planning), Chartered Secretary, Advanced Diploma Applied Corporate Governance.

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