Article By Alex Gavrish, Etalon Capital Ltd; author of “Story Investing”
Current market crisis presents investors with an opportunity to learn an important lesson. The lesson which once took a generation or a lifetime to learn can now be easily grasped. This lesson being that stories and narratives change economic reality not less but even more than actual material developments. Both for the good and for the worse.
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It is obvious that the narrative about crisis and economic or market collapse had spread quicker than coronavirus itself. One cannot hold oneself but to compare current situation to a global crisis fueled by subprime mortgage bubble.
It took some individuals few years to expose and profit from 2008 crisis. What allowed them to do this is the correct identification of story. The story of America’s credit market. It just took some time for this story to be reflected in our perception. Once it happened, market developments easily followed.
It took George Soros years of life experience to understand “the observer and the observed” paradox to its full extent. Subsequently he developed his own philosophy to look at the world and markets not as some outside, objective reality but as a dynamic process where our actions and perceptions influence reality as well.
It took institutional investors a global credit crisis of 2008 in order to provide support and give rise to a wave of shareholder activism. They understood that if someone will not try to inject meaning and actively react to objective reality and, on the way, to influence market’s perception and stories told about companies and businesses, it will take maybe 20 years to bring the market back to where it was before the crisis.
How Activist Investors Present Their Investment Thesis
When activist investors present their investment thesis to the general public, they not only communicate a reduced model consisting of simple facts such as low valuation ratios and recent share price under-performance. They often tell a story: about a struggling business, a corrupt CEO or management team, a restructuring process that failed or is not reflected in the share price yet, a strategy for improving the business and a myriad other types of stories. Just like great artists, activists tell these stories with emotions, with an intrigue, with drama, with conflict, with struggle.
The result being that they diffuse a correct story into the minds of investors and market prices of shares and companies change.
In my book Story Investing I discuss exactly this approach and how it can be implemented at the micro level analyzing and investing in companies. But the key here is not to take advantage of a story or create one where one does not exist, but to look at individual companies and their shares as you look at a good story: with a three-part story structure, important turning points, struggle, emotions and surprises.
The stories here are tools, models if you will, that allow to work better with a dynamic and partially unknown reality. Jerome Bruner, a famous cognitive psychologist, explains that narrative mode of thinking leads to conclusions not about certain absolute truths, but about varying perspectives that can be constructed to make experience comprehensible. By telling stories, we formulate these different perspectives.
Not An Objective Reality But A Panic-Driven Story
It is obvious that current narrative about economy and companies is not based on an objective reality but is a sick and panic-driven story. Sick just like the coronavirus itself.
Yes, it is true that some market sectors and companies suffered, such as hotels, airlines, etc. But most would probably agree that the situation is a temporal one, in due course the measures taken will limit the spread of the virus, vaccine and medicines will be developed and life will return to normal.
But despite this, objective reality of share prices and valuations of companies had changed unjustifiably thanks to the speed-of-light spread of this ill-perceived story. This story is so obviously sick that even Warren Buffett who in 2008 published an opinion in New York Times “Buy American. I am” simply seems to be just tired this time of preaching to public about eternal value investing principles.
Bottom line is clear: where at a micro level one should utilize stories and narratives as a useful tool or model to work with dynamic and partially unknown reality, at a macro level narratives are often a virus and one should fight it, just like one fights a real virus.
