Meme Reversion

500 and Counting

I’m now about 500 posts and a million words into the back-to-front world of financial psychology and you might think I’d have learned something useful by now. Well, it turns out there are only a couple of things you need to bear in mind: that mean reversion is the only certain thing about markets and that (almost) no one is interested.

The reason that no one is interested is that everyone is convinced that they can identify the narrative, the story, the meme that will find the next wonder stock that defies the law of mean reversion. And you might, but the chances are you still won’t become filthy rich on the back of it, because only in hindsight is success inevitable. 

Is it a bird?

Gravity defying super-stocks do occur from time to time, companies which happen upon some moat, establish their business and then successfully defend their margins against all and sundry. Of course, even super-stocks eventually run out of growth, but they can last for a very long time.

Looking back at the trajectory of these stocks it’s always easy to see why they were successful; but that’s an illusion: because we can’t put ourselves back in the state before we knew they were destined to achieve glorious success we can’t see the issues and the pitfalls that they had to circumvent to achieve success. All we can see is the outcome, not the process.

This problem of hindsight blinds us to the difficult of selecting and holding onto the next wonder stock. If you look around the markets today you’ll see a whole bunch of wannabees with fantastic business models or technology or marketing, some them with amazing profit margins.Any one of these may soar to glory; but most will fall to the pressure of the invisible hand.

As-Seen-On-Screen

But what’s even worse is that even if you identify a company destined for super stardom the chances are you won’t hold onto it. In the UK we have an online fashion retailer called ASOS which has ridden the rise of e-tailing brilliantly. I must know 50 people who bought this as a penny stock at under 30 cents. ASOS is currently worth about £30 (roughly $40) a share; at times it’s traded at twice that figure.Not a single one of those investors held on for the ride.