The original version of this article first appeared in The Business Times.
Here is a handful of true and absurd stories in markets over the last year.
50,000 per cent realised return in three weeks
A few weeks ago, a group of friends thought it would be a good idea to buy some NFT artwork.
Three friends bought at the same time for $100 each. They all got “rare” artworks, and one friend sold for $25,000 after just two weeks. A week after that, another friend sold for $50,000 after just a three week holding period.
My final friend is still holding on after six weeks, and has the artwork listed for $100,000 waiting for a willing buyer.
GameStop and AMC are down around 50 per cent from their highs
It was just earlier this year that the GameStop saga stopped all of us in our tracks. Through a roller coaster of retail investors versus hedge funds, short squeezes, Tweets and Reddit, GameStop and AMC surged by over 1,700 and 1,800 per cent respectively. They ended the year down around 47 and 57 per cent from their highs, but still 760 and 1,253 per cent up on the year, respectively.
This phenomenon shows us that markets can behave irrationally for extended periods of time, but that does not make them fake or ignorable. We must remain humble to the prices set by the millions of buyers and sellers every day.
The largest companies in the world got bigger
At the end of the last decade, we wrote an article about the largest public companies in the world by market cap and how this list actually changes quite a bit over time. Looking 2 years on, we end the year with 6 companies over US$1 trillion in market capitalisation, and among them 2 with over US$2 trillion. Apple is closing in on US$3 trillion. This contrasts to only 3 companies over US$1 trillion at the end of 2019.
Despite this enormous growth of the mega-caps, companies of all sizes fared well. The index for the world’s small value companies outpaced large and mid-cap companies, with a total return of 21 percent versus 19 per cent for the year (MSCI ACWI Small Value versus ACWI in USD).
Stock markets felt volatile, but were far from it
Looking at the news, Covid uncertainty, and ongoing dramas of crypto, inflation, commodities, China tech and property, SPAC mania, and more made the year feel wrecked with anxiety.
Contrary to emotion, stock markets sailed through to be one of the smoothest years on record. We were almost at all-time highs the entire year and had one of the smallest intra-year drawdowns of only -5.6 per cent. That is nothing compared to recent years, and typical drawdowns of -10 to -40 per cent.
Important: everything has a live order book
Prices of different assets don’t miraculously appear out of thin air. They are dependent on actual realised transactions.
An order book is a ledger of buyers and sellers, bids and asks, constantly being matched for transactions to happen. When a transaction happens (a buyer is matched with a seller) a price is published and the markets keep humming along, matching more and more buyers and sellers and setting new prices. The price we see is just the latest price that has transacted.
Every day over US$600 billion is traded in global stock markets alone, changing hands between buyers and sellers who think they are getting a good deal. Commodity, bond, and currency markets are multiple times that, reaching around US$10 trillion dollars per day.
When it comes to investing or speculating, it is imperative that you remember this phenomenon. I have seen so many friends and family look blindly at the direction of prices alone and not think of the underlying drivers of the price.
Liquidity can vapourise, and prices can drop fast and hard
The 50,000 per cent return of my NFT-faring friends is impressive, but on such “rare” items all it takes is 1 buyer to bid up the price to this enormous return. With a sudden change of taste, buyers can disappear in a flash, and with no liquidity, prices can drop like a rock, or there can be a case where there are no buyers whatsoever. Furthermore, without much regulation, these thin markets are easily subject to manipulation.
We have seen global stock markets drop by over 30 per cent in a matter of weeks despite over US$600 billion in daily volume. When it comes to assets that do not derive cash flows and do not have a much consistent volume, these drops can be much more sudden and triggered by just a few players with an entire global market to catch a fall.
For my final friend waiting to sell his artwork for $100,000, this may very well be the case. I wish him the best, but he does not want to be holding the bag when the music stops.
Respect the markets
Everyone seems to constantly be surprised by the markets. I feel as though we are on some crazy carousel with crystal ball predictions and constant “certainties” that do not happen just throwing everyone for a spin.
We need to remember the fundamentals and believe in markets, and that it is difficult to outguess the millions of buyers and sellers pricing securities every day. Speculate if you must, but know what you are facing with 2 eyes open.
When it comes to essential wealth planning and investing, respect the markets and take a less subjective, more scientific approach to build long-term wealth. Be broadly diversified and low cost at a risk level suitable for your goals so you understand and can stick with your investment plan through volatility.
We live in a world of non-stop information, innovation, deception, greed, fear, and gameplay. The markets are made of human activity pricing everything around us. We humans have, as usual, created some incredible results in 2021 and I am sure, unsurprisingly, 2022 will be no different.
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