Shares and cricket

 Written January 22

I believed shares and cricket had nothing in common but the recent resignation of the popular and successful captain of the Australian cricket team – Tim Payne, because of a lewd text message scandal made me think differently. He felt obliged to resign the captaincy and it appears that his cricketing career could be over, even though the matter related to his personal life, occurred some years ago and was not connected with cricket.

In a similar vein, recently the premier of NSW – Gladys Berejiklian resigned because of the scandal around her relationship with another MP – Daryl Maguire, even though she was a very popular premier with a good history in the role and there was no firm evidence of corrupt conduct on her part stemming from this relationship.

There’s a rule of law that punishment for a crime should match the severity of the offence. This seems fair and reasonable so you might imagine this rule would apply to other situations but it often doesn’t. To my mind, in both these cases trial by media led to punishment which was swift and deep and greater than that which seems appropriate. Evidently someone with a public profile needs to be extra cautious because any misdemeanour (or even possible misdemeanour) is considered newsworthy and trial by media often follows.

As my thoughts ran along this line I realised that shares often receive the same type of treatment for any news regarded as adverse. The share price may be punished to a greater extent than the offence merits – and with shares it’s the possible impact on company profits. In many cases news about a share can be favourable – for example when a big lift in profits is announced, yet there’s a substantial share price fall!

In such cases, there are two possible explanations:

• Investors anticipated an even bigger lift in profits than that announced,
• Hidden in the fine print of the announcement is the hint that there are some adverse indications that may have some impact on profit growth in the future.

Often a ‘me too’ effect occurs and other shares in the same sector can be similarly punished, even though there’s no announcement from them! For example when the Commonwealth Bank’s share price recently fell nearly 10%, the share price of all other banks took a suffered a similar fate. 

As I speculate on the severity of share price punishment a few possible reasons come to mind:

• It’s a particularly perverse human trait that bad stuff receives more public scrutiny and attention than good stuff. This effect has been used by the media for ages, as in the well-known saying: ‘good news doesn’t sell newspapers’. When the scandal about Tim Payne surfaced there was huge media interest and every possible angle was discussed for days on end. On the other hand, good news – such as when a batsman scores highly or a bowler takes many wickets, is reported and discussed but not to nearly the same extent and is quickly forgotten. Perhaps it’s a natural expectation that batsmen should score runs, bowlers should take wickets and a Premier should do a good job of running the State.  Similarly, a company should continue to make profits and when they do so it’s not newsworthy but if they foul up in some way this transgression receives media attention.
• There’s another factor (discussed in detail in my books) known as the ‘momentum effect’ that comes into play when news about a share is released – or even just anticipated. News about a listed share is in the public arena and everyone is able to see how others react. It needs only a handful of investors to view the news unfavourably and sell their shares. The resulting small price fall is noticed by other investors who may get a little jittery and decide it’s best to go with the flow so they also sell their shares. Before long, the initial wave can grow into a tsunami and the share price is punished way more than is justified by the news that caused the initial fall.

As a share investor what’s your takeaway message?

It’s generally best to go with the flow but at the same time I suggest you try to look at share announcements dispassionately. Rather than getting sucked into hype, ask yourself: ‘what’s the most likely impact on company profitability?’ If you keep a cool head you may be able to make profits when a share’s been unduly punished. After the fall, there’s a good chance the price will rise again as the hype dissipates, reality returns, and investors realise the company has sound credentials.

A good example that illustrates my point occurred with ASX shares. I regard the ASX as a sound company in a sustainable business making good profits and rewarding investors with a worthwhile dividend. In early Sept 20 their price was around $90 but started downtrending. I tried to find the cause and examined the announcements, reviewed the financial history and director’s reports but could find no rational explanation. I kept tabs on the shares, and in early March 21 they had fallen to a low of about $67. After this point, the price began to rise and when I was convinced of a true change in trend, I bought in. My patience was rewarded with worthwhile capital gains as the share price rose to around $90 again, and there’s the added bonus of a good dividend.

This example is by no means an isolated one and this scenario enacts many times. So it’s worthwhile trying to distinguish hype from fact, especially in these volatile times. If the facts don’t support the hype I suggest it’s best to keep a cool head and devise a strategy so you can profit from the true reality of the situation.