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  • Writer's pictureRyan

Irrational Exuberance

This week's post covers two stories that illustrate how crazy the stock market is. When people tell you that the stock market is "efficient" ask them what they think about these stories. 

Of course, on average, the market may be efficient but that doesn't mean there isn't room for error. It's the same in economics. Economists think that they can calculate everything because of one big assumption: people act rationally. 

But just drive on the freeway for 2 minutes and you'll see that isn't true. As long as humans are investing in the stock market, it won't be efficient. Sure, as computers account for more and more trading, the efficiencies should grow smaller. However, even then, humans will still have a few small advantages (talking to people, long-term view, etc.)

Ok back to the stories. 

On October 3rd, 2018 Apple's market cap, the value of the entire company, was $1.1 trillion. Yes, trillion with a t. On January 3rd, 2019 just three months later, the company, once the biggest in the world, was worth $670 billion. 

That's $430 billion in 90 days. About 65 of those were trading days. So that's about $6.6 billion per trading day. Further, there are only 7 hours in a trading day so that's about $945 million per hour. 

There you have it. Over the course of 3 months, Apple lost nearly $1 billion in value per trading HOUR. Not day. Hour. 

But the story doesn't end there. The stock bottomed on January 3rd, 2019 and now in April of 2019 the company has added back over $300 billion in value. 

I won't bore you with the calculations, but think about it. In 3 months, the company lost $430 billion in value. More than Netlfix and Disney...combined. But then in just four months, it added back $300 billion. 

How does that happen to one of the biggest companies on Earth? 

If the market is truly efficient, is that even possible? 

The premise of the efficient market hypothesis is that all new information is immediately embedding into the price of a stock. That is garbage. 

What information between October 3rd and January 3 led to a loss of $430 billion? 

Trade war stuff? 

The point is that the market isn't always efficient. Here's another example. 

A company named Zoom, a SaaS player in the videoconferencing space, IPO'd yesterday. Investors clamored for a piece of the action as the stock zoomed (forgive me, it was on a silver platter) up 72%. 

Other, less sophisticated investors, clamored into another stock. But first, a little background. 

Zoom's ticker is ZM. It's a great company and investors obviously agreed. 

However, there is another company with the word "Zoom" in it. Zoom Technologies (ticker: ZOOM). It is a microcap company worth $8 million. Yesterday, ZM, the IPO, closed at $17 billion. 

So $8 million vs. $17 billion. M vs. B. 

But check out this chart. 

Zoom Technologies (ZOOM) was mistaken for Zoom (ZM). Investors bid up ZOOM nearly 500% before realizing it was the wrong one! 

Then it dropped 80%. 

But it didn't stop there. Yesterday, ZOOM doubled, even more than the real ZM! 

Just madness. 

So there you have it. Us humans are emotional creatures. Therefore the market is not always efficient. 

However, here is where the real nuance lies. 

Investing is hard. If we always think we are right and assume the market is wrong, we'll learn quickly that is doesn't work that way. 

It might seem like I'm going back on all I just argued for, but believe me, the market is a humbling place. 

I think the right mindset when approaching the market is to have a default that you're wrong and the market is right. 

This forces you to do the digging to determine why you are right versus lazily thinking you are always right. 

Having this mindset is important because investing is all about the search for truth: what should this company be worth?

There are a lot of smart people out there. Being prideful and believing we're always right is a sure way to eat a serving of humble pie. 

My advice: set a default that the market is right but then do the work to show why you're actually right. It's not easy but that's the whole point. If it was easy, there would be no reward. 


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