This year some company shares have gone hay-wire. US-listed GameStop has risen more than 10 times, AMC Entertainment is up seven times. Shares in renewable energy companies globally – including Meridian in New Zealand – have been beaten back after a strong 2020. Investors hoping to make a quick buck in My Food Bag’s stock exchange listing were burnt and are now down 12 per cent.
Short-term share price moves are important to understand – but often the explanation comes not from what happened last week nor what may happen next week, but by staying aware of long-term trends.
Investors in My Food Bag should have had an eye on the fact that over the last year the online Covid-19 world had roughly doubled the share price of German listed competitor Hello Fresh.
Chances are by the time My Food Bag floated, investment gains from the online food model had already been baked in. Looking back a year or two, not forward a few weeks, was important.
Many investors want their savings to provide safe and steady returns, but low global interest rates wreck this plan. A one-year bank deposit at only 0.80 per cent doesn’t protect against inflation after tax.
Investors seeking safety have looked to alternative sources of income like dividend stocks, with listed Spark, power companies and property trusts having proved popular. This illustrates that long term interest rate moves directly impact share prices, meaning if you invest in shares you need a clear view on where heavily suppressed global interest rates are heading.
Technology also impacts share prices.
Audi’s chief executive admits that Tesla’s battery tech and software platform is two years ahead of everyone else – which helped to drive Tesla’s share price up six times last year.
But technology brings challenges as well as opportunities. 2020 was strong for tech companies while 2021 has been tough going.
Technology and sustainability are now intersecting. Innovation brought us coal-fired power stations but we now need technology to unlock cleaner sources of energy.
governance grounds doubled through 2020. This investment trend, driven by regulation and consumer demands, has become unstoppable. Be sure to factor this into your long-term investment decisions.
Technology has also digitalised finance, bringing open access to investing and a more level playing field.
Millennials and iGen (born 1995 to 2012) have stampeded to investment platforms like Sharesies in NZ and Robinhood in the US. And with freely flowing information on social media, these investors have stepped up and taken on the professionals.
Literally millions of small investors bought shares in Gamestop, Blackberry and AMC Entertainment which had been some of the most shorted stocks by hedge funds.
Shorting means hedge funds sold shares when they didn’t own them. This is a risky strategy because if the share price goes up the hedge fund must buy to cover their position at a higher price, and at a loss.
When you buy a share you cannot lose more than your original investment. When you short, losses can be massive and many times the original share price.
Loosely coordinated action by young amateur investors squeezed these shares up and caused a world of pain, and billions in hedge fund losses. These funds learned the hard way that smaller investors now have access and power in markets.
This democratisation of investing has risks but should be a big positive.
GameStop share spikes and expectations from new company listings encourage investors to check share values or KiwiSaver balances every day. Yet it’s important to approach investing from a long-term perspective. The impact of ageing populations, suppressed interest rates, technological changes and mass investment access for young amateurs cannot be ignored.
We hear about success for many this year from the meme stock frenzy (GameStop, Blackberry and others), but little about the large losses for many amateur investors. Don’t lose sight of the fact that long term wealth is generated by playing a long game.
John Berry is co-founder and chief executive ethical investment manager Pathfinder Asset Management which manages KiwiSaver and managed funds.