Thu. Jan 20th, 2022


The author is a Deputy Lecturer at William & Mary and the author of an upcoming book on confidence-driven decision making

2021 was a year that will long be remembered for retail investors’ blatant bullying of “meme stocks” thanks to social media sites like Reddit and online trading platforms like Robinhood.

The rocket ship emojis and popular trends that included trading in non-fungal signs of cartoon bored monkeys were manifestations of a profound tendency towards extreme abstraction. Of spaces, to cryptocurrencies, to NFT’s, to Web3 and the metaverse, what investors wanted most were things that, well, were hard to explain.

Relative abstraction is not something that investors pay much attention to. Instead, they discuss benchmarks such as relative valuation – how the current cost of a stock compares to times that have passed or something else they can buy. “Shares are cheap,” they say.

Cheap and expensive are interesting benchmarks, but they do not tell the full story of investor confidence. It’s what is cheap and expensive that reveals how we really feel.

At lows in confidence, investors yearn for certainty. They buy shares in the safest companies, those with tangible assets, “real” earnings and cash flow, if they buy shares at all. On the other hand, at peaks in confidence, investors have an insatiable demand for possibility. They buy dreams at the highest price.

Today, what is most expensive is what is the most extremely abstract – the enterprises that have the biggest “hypothetical”, as it were, the anti-real. The crowd worships everything that is at the farthest corners of psychological distance – in time, in place and in fame. We all just need binoculars to see it out there on a distant horizon. Futuristic investment themes such as space travel speak to our insatiable appetite for the psychologically distant opportunity.

We have come a long way from the intense concreteness at the bottom of the 2008 financial crisis, when the greatest psychological distance investors were willing to consider was about as far as the mattresses in which many were planning their physical cash. and gold to stop.

Something else has also changed: the investigation into what investors buy. If markets are just rising, why bother – especially since in many cases you will not understand it anyway? On top of that, the past decade has been filled with financial deregulation – lowering disclosure requirements that enable more companies to go public while providing less information.

The net result of the high confidence is staggering: investors are now committing the most money to the most abstract opportunities in history while paying the least attention.

Blind investing is one thing, but the extreme approach by investors warns that we may have reached sentiment for the record books over the past year.

Already hidden behind the move higher in the broader major stock indices, we have seen a steady pullback of extreme abstraction.

Spacs, the “specialty procurement companies” that raise funds and then look for a business to buy, now feel like a distant mania despite a modest recovery in their use late last year. The value of many of these hypothetical laden companies has declined sharply. Shares in electric vehicle manufacturer Lordstown Motors, one of the most prominent spaces, fell more than 90 percent of their peak. And there is a definite drop in energy around cryptocurrencies, which is also reflected in lower prices from peaks last year.

History warns that the end of extreme abstraction does not bode well for those who arrive last at the party.

As the market shifts to other less abstract investment themes, there is a danger of a vicious circle developing. Not only will investors turn to more “real” investments, but the investigation is intensifying into recent crowd favorites revealing that there were even fewer than were the eye in many of them.

We both saw behavior when the dotcom bubble burst and in the wake of the 2008 financial crisis. And therein lies one last overlooked aspect of the past year. If 2021 were the culmination of another bubble in unfounded possibility, it would represent the third for this generation of investors. It’s hard to imagine many would accept it well to be fooled a third time.

As I look ahead, the biggest risk for the financial markets is not a decline in corporate earnings or a policymaker’s wrong move, but a sudden change in investor thinking. After years of devouring abstraction, the crowd is turning to more substantive investment themes – a year of becoming real? That process would go far from smooth. Even if more solid ground is better for the long-term direction of markets, those who stormed in when prices were “after the moon” will be hurt as valuations return to earth.



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