Twitter birds of a feather, trade stocks together

In today’s data driven age of communication, people tend to exchange more noise. This proposition, more commonly known as Priestley’s Paradox, is also telling of the fact that evidence is disregarded in the face of a good story. Political campaigns win more on marketing teams spinning stories that highlight the personality, rather than on the content of the person’s manifesto. This typical public response is interestingly exhibited in a space where numbers are generally expected to triumph over narrative and sentiment. Human beings have a way of falling back into old habits, and markets are not immune.

Markets are simply the place where buyers and sellers haggle to find a price, be it in Pettah or on Wall Street. This price discovery is arguably the most important part of the interaction, as participants now can articulate in money terms: what stuff is worth to them. Valuations should be driven by objective research and well-founded assumptions in forecasting. As researchers develop aptitude in various methods of technical and fundamental analysis, the sell side agent or broker, would use this to persuade a transaction. Market participants are then free to trade. 

Recently with social media, this communication is filtered through a personality or ‘authority’ group rather than a research report, thus adding noise and blurring sound investment decisions.

This phenomenon is in no way unique to our local markets. In late January of 2021, Bitcoin’s value escalated more than 20% to $ 38,566 after Elon Musk changed his personal Twitter account’s bio to #bitcoin. This increase was based on speculation alone that the billionaire had bought more of the cryptocurrency, causing a buying frenzy that shot up the value of the asset. Similarly, r/WallStreetBets, a popular message chain on social media apps reddit and discord, had users rallying around a dying penny stock company. Gamestop, a video game retail company that had many years of lacklustre performance saw its worth reach over $ 24 billion from just $ 2 billion in a matter of days, only to come crashing down after.

Sri Lanka has also seen similar social media driven action following the sharp rise in stock market interest post COVID-19 related lockdowns and work from home mandates. A cohort of new retail investors, eager to win big, may have turned to Twitter and WhatsApp groups prematurely; continuing on the small wins over larger losses that continue to be portrayed as that which ‘can be won back’. Therein lies the problem. As a democracy would flourish with a well-educated electorate, a market performs best when its participants are knowledgeable and understand risk, instead of rolling the dice on stock investments.

In order to obtain some exposure to the market with limited trading knowledge or resources to track, monitor and optimise a portfolio, there are multiple forums organised by the SEC and CSE. Online courses on investing are very popular and affordable to get anyone willing and able to invest; while mutual funds, locally referred to as Unit Trusts exist for busier individuals.

Making an informed decision is key to navigating a market and preventing losses. What most participants fail to realise is something the Securities and Exchange Commission, to their credit, is quite clear about: past performance is not indicative of future returns. Therefore, even the winners of one bull market may not withstand the heat of the dip, to see the next.

One cannot simply criticise Musk, the WallStreetBets sub reddit and any other market guru with their elaborate claims. An individual, social media group or research house for that matter acting in their best interests – given the access to information, level of authority or advice they yield - cannot necessarily even be held by a regulatory body to be committing a market violation. Market participants are ultimately responsible for the trades they make off their capital. All valuations have a margin of error as no one possesses a crystal ball to see with certainty what the future holds.