Herd dynamics are in full effect in markets these days. I wouldn’t touch them with a barge pole.
Humans are funny. Human herds are even funnier.
In financial markets, herd dynamics have been in full effect over the past few weeks. First we had a string of bank runs on smaller banks in America – runs which killed off Silicon Valley Bank and Signature Bank.
No sooner had the herd stampeded out of smaller banks than it stampeded back into Bitcoin, and Bitcoin’s price surged.
Why?
Because reasons.
There was two good stories the herd could point to. Either it meant more money printing from the Feds, which is good because Bitcoin is a risk asset. Or it was proof that the financial system is inherently fragile, and only Bitcoin is the solution to that, because Bitcoin is not a risk asset, but a store of value.
“Banking failures mean more money will be pumped into the system, and traders are getting ahead of that,” Lisa Wade, chief executive of ASX-listed DigitalX and a former Citi trader, said.
Bitcoin is still seen as a high-risk asset and the market was risk-off. Now there might be the brakes on rate hikes, so the market’s preparing for a risk-on environment.”
“But deeper than that financial institutions are failing again,” Ms Wade said. “Bitcoin was invented for this very reason. It’s a peer-to-peer cash system that doesn’t use a financial institution.”
Why not both?
And then we had 2021’s favourite meme-stock, Gamestop. After skirting bankruptcy for years, Gamestop finally posted its first profitable quarter in two years.
As a result, it’s shares jumped 40%.
Well, that’s what the financial papers said. Because it’s all very neat. Markets like profits. Share price goes up. Simple.
But the truth is probably much, much murkier. Gamestop is the OG meme-stock. Meme-stocks are another name for herd stocks.
And when the herd got a whiff of a bit of good news, it started stampeding again, as everyone in the herd tried to get ahead of the herd.
The point is, that the media will try to sell you some neat story about market reacting in a rational and proportionate way to some bit of news or the other.
But when you’re looking at herd-assets – assets who fluctuations are almost entirely driven by the ‘mood’ of the herd – then the news barely matters. It’s only what the herd thinks the news means, not what the news actually means.
But you know who can predict the herd?
Nobody. Many people have tried. Some got lucky and got rich.
Most didn’t.
It’s why I’m just not interested in herd plays. It’s why I like property.
Yes, it’s more ‘boring’. Nobody ever saw the property go up in value 10,000% over night.
But I like that. I like that I have control. I know the numbers. The outcome of any deal will land in a very predictable range if I do the work.
I’m not about to gamble my wealth on correctly predicting which way a herd is going to run.
I’m not an idiot.
DB.