If I tried to imagine the public as a particular person…I should perhaps think of one of the Roman emperors, a large well-fed figure, suffering from boredom, looking only for the sensual intoxication of laughter.
Søren Kierkegaard in The Present Age (1846)
From time to time, readers point out to us that when we explore individual stocks and investments, we tend to focus on stocks that are more obviously in the news. Mea culpa. In our defense, it’s usually more interesting, and it helps us to demonstrate narrative patterns more clearly. It is also true that not all stocks and investments are equally influenced by narrative. But even that can be useful to know. Especially for those of us more attuned to value investing.
As always, the reason it is useful relates to investor behavior. We think that the absence of clear narrative is often indicative of complacency or conditioning. When a stock has performed consistently well or poorly over an extended period of time, it is natural for the attention paid to the drivers of the company’s returns and results to wane. The missionary’s job is done, so to speak. When the owners of a positively trending stock become complacent, the logic goes, bad news is often shrugged off and ignored more than it would be for a comparable stock. Likewise, for a stock or company stuck in a long-term rut, investors may become so conditioned to a continued stream of lousy news that green shoots pass by with a corresponding kind of under-reaction effect.
To value-with-a-catalyst investors, these are archetypal opportunities: companies which have regained some operating momentum, but for which active price setters in the market are too conditioned to malaise to update their views as much as they ought to. Figuring out the catalyst is its own challenge, but identifying the signs of conditioning and malaise? Here’s what they look like in narrative space:
You can probably guess which company this from the tags, but in case it isn’t familiar, this is the narrative map from the last 3 months for General Electric. Folks, this is what an ocean of indifference looks like.
Like many industrial conglomerates (which it still is, even if less conglomerated than it once was), GE has products and businesses in far-flung markets. In addition, as you might expect, market research and consulting firms constantly publish commentary and discussions of those segments, products and businesses. So while there are people – wonks and people trying to sell slides for decks to banks and competitors, mostly – who care deeply about what General Electric is doing, the Financial media are not among them.
When financial media has written about General Electric lately, the central focus of the articles has been ‘the turnaround’, language used in almost every piece. Those articles include the kinds of things you’d expect in a turnaround: write-downs, cash flow questions and one-time charges. For obvious reasons, these ‘turnaround’ articles also bear a lot of similarities to articles about the recent change in CEO. And while there is a bit of humor to be had in how the tone of the articles about Larry Culp changed after a brief pop in the stock, the new CEO stories and the turnaround stories are part of one narrative, and really the only narrative being told about the stock right now. Both of these topics are, understandably, linked to GE’s languishing but critical GE Power business, struggling to deal with gas turbine demand that is far outstripped by global manufacturing supply. It is a big part of the mess Culp was charged with fixing.
But this is a surprisingly narrow set of topics for a company like GE. Tellingly, even the financial media reports that incorporate changes in ownership, or sell-side / buy-side participants talking about their opinions, are completely untethered to the fairly disinterested turnaround narrative. Aviation, healthcare, renewables, oil & gas and transportation are all pictured outside the frame. It isn’t that the sentiment attached to all of these topics is profoundly negative or anything. People just don’t seem to care. Beyond telling me that people have just given up and gotten bored, what else would this tell me?
- I think it tells me we’ve now got a universe of investors who are well and truly conditioned to perma-turnaround GE.
- I think now is the time I’d be looking more closely for signs of underreaction to good news on things I believed were potential positive catalysts…I mean, if they ever have any.
- If and until that happens, the narratives strike me as being conducive to the current trend.
As a more general observation, we think that behaviorally oriented investors in a Three-Body Market would do well to more actively incorporate complacency and conditioning of market participants into their thinking. Price and market structure analysis can give investors some sense of those things. We think an understanding of narrative helps fill out much of the rest.