Head Spin

This article was first published in the National Post on April 1, 2023. It is being republished with permission.

by Tom Bradley

I was an equity analyst when investors were trying to figure out how quickly mobile phones would penetrate the market. It was when they looked like bricks, and Rogers and the telephone companies were just starting to build cell towers. I recall us agonizing over whether 3% or 5% of Canadians would be using cellphones in five years.

This sounds ridiculous now, but it’s a reminder of how difficult it is to make forecasts for new industries (ask cannabis investors). There are so many unknowns, including the pace of product improvement and price reductions, and, of course, the fluidity of social patterns.

I’m reflecting on this because it feels like we’re set to make the same mistake our team made in the early 1990s. The pace of new inventions and the adoption of existing ones is going to make our heads spin. There’s a wave of emerging technologies coming at us, such as artificial intelligence (AI), alternative energy, robots, genome sequencing and self-driving everything.

There’s also a tsunami of new applications using existing technologies. If you think an innovation isn’t very good, wait five minutes. It will get better and quickly be a part of your daily life.

For example, AI’s usage has been building for years. The emergence of ChatGPT is its coming-out party. Assessing AI’s value, however, is fraught with skyhook assumptions, which makes stock movements hypersensitive to changing narratives. Nvidia was perceived to be a winner in the AI race and its stock shot up. Alphabet stumbled out of the gate and its shares got dinged.

These two stocks are examples of how new technologies are contributing to market volatility. In 2022, volatility was higher than in any year since 1945 when measured by the number of days with big price movements (the S&P 500 moved more than 1% on a third of trading days). But there are other reasons for the wilder ride.

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Dave Picton, chief executive of Picton Mahoney Asset Management, talks about how the market has gone through structural change. Volatility is higher and cycles are shorter. Bottoms are reached more quickly and recoveries come sooner than expected.

Evidence bears this out. The tech wreck in the early 2000s played out over two and a half years. The decline related to the 2008 financial crisis was over in less than a year. The corrections in 2016 and 2018 lasted a couple of months. And in March 2020, the market was back on a tear within a matter of weeks.

Asked what has caused this acceleration, most analysts answer in terms of macro-economic factors such as interest rates, the war in Ukraine and China-United States relations. These have contributed, but are episodic and, in some cases, cyclical. The structural changes Picton refers to are more lasting.

The gamification of investing is part of the change. I’m referring to the “go big or go home” approach pursued by phone-toting day traders using slick apps, free trades, options and social networks such as Redditt. In particular, trading in short-dated options (which is like buying a lottery ticket) has contributed to volatility.

This betting mentality, however, affects relatively few companies and has limited impact compared to the movement by enormous funds on Wall Street to deploy high-octane strategies. Some are driven by computer models, and many have a hair trigger, keying on factors such as price momentum and market volatility.

For example, there are long/short managers using leverage to enhance returns, which means their bottom lines can swing wildly, and there are more shares to buy or sell when they pivot.

What’s an investor to do in the face of these rapid movements?

First, expect the market to be dynamic and volatile. The ride has gotten bumpier.

Don’t expect to always understand it. The high-velocity capital mentioned above has a different time frame than you and is reacting to different things.

Don’t get discouraged. The theory behind stock investing hasn’t changed. By owning a portfolio of stocks, you’re a partial owner of a variety of businesses and are building wealth through their growth and dividends.

Do your work ahead of time. Picton and other investment managers talk about how opportunities are fleeting. If a stock you’re following gets crushed by a market downdraft, or industry-specific issue, you need to have done your research, understand the issue (if there is one) and be ready to act.

The market’s speed and volatility are gifts for those who have a good sense of value and can keep their head from spinning.