Markets are Driven by Numbers, Right?
by Justin Long, on Jan 24, 2022
Earnings, interest rates, expectations of future growth, etc.
It's just a math equation.
Or is it?
There's the story itself.
The story folks tell themselves about what's happening and what will happen.
And often, the story and the numbers contradict each other.
We see this with every bubble and period of irrational exuberance, when prices detach from the fundamental facts in a way that's puzzling, infuriating, and completely irrational.
What's behind this? Emotions, stories, and plain old human psychology.
NFTs (non-fungible tokens) are a fascinating illustration of this conundrum.
There's no rational, fundamental reason why ai-generated image files should be trading for thousands or millions.1
But the story says different.
These images have become central to crypto culture.
Folks are telling themselves (and each other) stories about the decentralized revolution offered by the blockchain.
Hence the astronomical amounts of cash changing hands.
The dot-com bubble was another example from not so long ago, when unprofitable internet-based companies went public at ridiculous valuations, driven by investor belief in the power of the internet and a deep-seated fear of missing out on the revolution.
Then something changed.
The story. The emotions.
Investor belief in the value of these internet startups.
Does that mean that all market crazes are destined for disaster?
That's impossible to say. Bubbles only get labeled as such when they're in the rear-view mirror.
So, what do we do with this information?
How do we use it to make smarter decisions?
Well, we can start by accepting that numbers don't have all the answers.
That the stories we tell ourselves and each other are at least as powerful as the facts.
And that stories aren't right or wrong. They simply are.
We can learn to ask more questions, treat mysteries with curiosity, and look for the compelling stories behind them.
What do you think? Do you see any interesting narratives in the world around you?
Justin Long, CFP®
Diazo Wealth Group
P.S. Interested in reading more about stories, psychology, and markets? Morgan Housel (author, columnist, and investor) writes a lot on this topic here and also wrote a whole book on the psychology of money. Fascinating stuff.
P.P.S. Have any reading recommendations for me? Please hit “reply” and share!
Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.