What really moves the price of an ASX share? Know the unknown
Image source: Getty Images
Do you think you are a good investor?
You keep up to date with ASX company news, educate yourself on economic and social trends, and don’t trade in penny stocks.
Unfortunately, no matter how hard you put in, there’s a good chance you won’t be better than anyone else.
The dilemma is that, unless they have illegal insider information, everyone has access to the same corporate and economic data.
This is the old Efficient market hypothesis.
“All that is expected is in the [share] price and the only thing that moves a price is the unexpected, ”Marcus Today director Marcus Padley said in a note to customers.
“It’s the Catch-22 of the investment. You have to know the unknown, because it’s the only thing that moves the course of a stock – the unexpected. “
Study the numbers as much as you want, it’s pointless
In the past, even basic information such as company financials had to be purchased and mailed to investors.
Now, with the Internet, it is available for free in a multitude of places. At once.
Padley said that means the advantage that value investors were supposed to have has evaporated.
“The ‘advantage’ that the ‘smart investor’ identified…, like the point of difference in his smart pants, has been arbitrated.
“When the market goes to hell, ‘value’ becomes a useful benchmark again, but in a bull market it is so 1950s. “
So what do we do then?
Because of this market efficiency, Padley believes that investors never make money with smart asset allocation or portfolio optimization.
“It was almost always a few simple events, fashions and trends that got the prices moving.”
So instead of combing through the company’s finances, Padley suggested that the best way to get through the end of the financial year is to develop “an opinion” and not “follow the crowds.”
The best place to start is with trends that have already gained momentum.
“It’s probably best that you stick to the current themes and not bet against them until proven guilty,” said Padley.
“The continuation of the trend is the most likely outcome in the stock market.”
Padley suggested the following 4 themes as “obvious” entries for the new exercise:
- A persistent bull market
- Real estate prices are rising, so ASX real estate stocks are “low risk”
- Interest rates will not rise significantly, so real estate investment trusts, infrastructure and utility stocks will do well
- Electric vehicles are coming, so shares of copper and lithium mines are increasing
Efficient markets can be beaten
The counter-argument to Padley’s point of view is that markets are not completely efficient and that good deals can be found from time to time.
This is the experience of senior Forager Funds analyst Gareth Brown.
“Markets can be surprisingly ignorant from time to time. Especially in the smaller segment of the market, ”he said on a corporate blog in March.
Brown took the example of ThinkSmart Limited (LON: TSL), which was a buy now, later pays a business in UK. After the Australian giant Afterpay Ltd (ASX: APT) bought the company, the shares of ThinkSmart were effectively a stake in the parent company.
Still, a huge gap between Afterpay and ThinkSmart stocks has emerged.
“Here’s what happened in the first 6 months of 2020. Afterpay shares are up 99%. And ThinkSmart shares are down 11%,” Brown said.
“And what about the almost 9 months since July 1, 2020? Afterpay grew another 73%, ThinkSmart 271%. “
So the market doesn’t always see everything, according to Brown.
“There are still a lot of things a diligent investor can do to gain the advantage. Look good and think smart.