The Stories We Tell Ourselves
Unfortunately, you’re never quite as smart as a rising stock makes you feel. And fortunately, you’re never as dumb as a falling stock makes you feel either.
“With showbusiness, you receive the greatest flattery and the greatest venom. And they’re both lies.” - Jerry Seinfeld
Eddie Murphy has one of the greatest filmographies in all of movie history, with a career that spans nearly 45 years (!), with the making of his first movie, 48 Hours, in 1982.
From 1982 – 1995, Eddie Murphy went on a crazy run, starring in Trading Places, Beverly Hills Cop I, II, and III, Harlem Nights, Coming to America, and Boomerang, while also filming his legendary standup special, Raw. Each of those movies grossed tens to hundreds of millions in box office profits, and catapulted Murphy to stardom.
For more than a decade, almost everything worked. The movies made hundreds of millions of dollars. Murphy became one of the biggest stars on the planet, and at various points he was arguably the biggest draw in Hollywood.
Then came Vampire in Brooklyn.
The movie was a disappointment. It became Murphy's lowest-grossing film to that point, critics hated it, and the reaction was odd. Suddenly everyone had an explanation for why the failure of the movie and poor performance by Murphy were obvious all along.
Murphy’s career obviously wasn’t finished, but what’s interesting in hindsight is how quickly one bad outcome seemed capable of obscuring thirteen years of extraordinary accomplishment.
And then, almost immediately, he did it all over again.
Following, Vampire in Brooklyn, Murphy went on another legendary run and from 1996 to 2006 starred in Mulan, Life, Bowfinger, Shrek 1 and 2, Dr. Doolittle 1 and 2, and both Nutty Professor movies. He became a major box-office draw for another decade, this time for an entirely new generation. Murphy was back to being praised, and back to being a star.
The lesson here is that we are terrible at keeping the most recent outcome in perspective. Public markets work this way constantly. A single failure becomes a referendum on everything that came before it while a single success does the same thing in reverse.
In our industry, narratives can be created so easily but have very little explanatory power. A company can be an absolute investor darling one day, and a pile of toxic waste the next. The truth lies somewhere in between.
What’s even more fascinating is how stock prices have an extraordinary ability to tell us how we should feel about what we own. Rising stock prices engender praise for the business, praise for the CEO and praise for the investors who were smart enough to make the right call. We tell ourselves that the business is wonderful, the CEO is brilliant, the competitive advantage is stronger than we thought, the industry has years of runway ahead of it. Investors who bought the stock saw something everyone else missed.
Then the stock drops 40%.
Declining stock prices elicit ‘I told you so’s’, vilification of management, and an attitude toward the business that everything is bad and always was. Suddenly the same company is poorly managed. The moat was overstated. The industry is structurally challenged. Management can't allocate capital. The accounting was always suspicious. Very little about the underlying business may have changed enough to justify either extreme.
There is a reason that investors use the phrase ‘price drives narrative’. That couldn’t be more true during certain periods we’ve all lived through.
A stock chart can become a kind of backwards-looking fundamental analysis. When the line goes up, we search for evidence that explains why the company is great. When the line goes down, we search for evidence that explains why it was never great in the first place. And because businesses are complicated enough, there is almost always enough evidence available to construct either story.
This is because markets are fairly good at valuing things that fit neatly into boxes. They are much less comfortable with businesses that don't, or businesses going through periods where the numbers temporarily stop confirming the prevailing story.
Rarely is reality so black and white. Most companies aren't investor darlings or toxic waste. Most CEOs aren't geniuses or idiots. Most investment theses aren't perfectly right or embarrassingly wrong. Reality tends to live somewhere in the uncomfortable middle.
As investors, our job is not to react to the emotional signal being sent by a stock price but rather figure out what has actually changed.
Did the competitive position deteriorate? Did normalized earnings power change? Did management do something that alters our assessment of them? Did the balance sheet become more fragile? Did the thesis depend on something that the latest evidence has now disproven?
Or did the stock just go down?
The same is true when a stock is ripping higher. A rising price doesn’t validate every assumption in the thesis any more than a falling one invalidates them. Even though this sounds obvious when written down, it’s incredibly difficult to live through.
A position that has doubled has a way of making every piece of incoming information look bullish. A position that has been cut in half has a way of making every problem look fatal. The biggest mistakes happen when eventually you stop evaluating the actual business and start defending or attacking a story about yourself. How many of us are guilty of this? Calling ourselves smart or stupid to have owned a specific company. None of that is useful at all.
When faced with these situations, it’s important to remember that we don’t have to become emotionless. I don’t think that’s possible, nor would it be helpful. The emotions of investing consisting of fear, excitement, embarrassment, frustration are all part of taking on risk in uncertain situations. The idea is to stop allowing those emotions to determine what the facts mean.
Unfortunately, you’re never quite as smart as a rising stock makes you feel. And fortunately, you’re never as dumb as a falling stock makes you feel either.
One bad movie doesn't erase Trading Places, Coming to America, and Beverly Hills Cop. And one disappointing quarter or one collapsing stock price doesn't automatically erase everything you previously understood about a business.
Sometimes Vampire in Brooklyn is just Vampire in Brooklyn.
MicroCapClub is an exclusive forum for experienced microcap investors to share and discuss microcap companies (sub $1 billion market cap) trading on global markets. Since 2011, our members have profiled 1400+ microcap companies, 300+ have turned into multi-baggers. Investors can join our community by applying to become a member or subscribing to gain instant access. For more information, visit https://microcapclub.com/
Comments
Loading comments…