Hello, this is Jeremy Richardson from the RBC Global Equity team, here with a few thoughts about what we’ve been seeing in global equity markets over the course of the last few weeks.

And I think one of the things that we’ve seen is a reminder of the importance of those two really significant human biases that impact many of our investment decisions, which is fear and greed. And that has really come to fore in this episode that we’ve seen recently of large groups of individual investors coordinating their actions through internet chat rooms, in order to support just a handful of individual stock names, and pushing some of these up to really quite really, really high levels.

In fact there was one retailer of video games and games consoles that saw its share price rise by over 20 times during the course of January.

Now that was a successful strategy, but it didn’t happen by accident. There was a sort of a catalyst for this which was the recognition on the part of many of these investors that there were hedge funds who were aggressively shorting these particular names.

And that led to a degree of fragility because if you’re shorting a stock, you are committing yourself to buying it back at some point in the future, which mean turns you into being a forced buyer. And if the losses on your trade are so large, you’re almost being encouraged to be a buyer almost at any price just in order to stop the financial pain.

So that can make shorting quite a fragile trading strategy, and that was exploited by the individual investors, who by pushing the share prices up were able to impose very significant losses on a number of the hedge funds who were shorting.

And in doing that they pocketed for themselves quite significant gains, and those gains, that greed enticed new investors into the stocks, which just sort of seems to sort of build upon the positive momentum we saw in these individual names, pushing these share prices even further, and even higher. Now but when the marginal buyer, when the forced bought, the hedge funds had closed out the positions, and there were no buyers left, we saw the opposite, which was our old friend fear come to the fore. And as everybody tried to exit at the same time it pushed the share prices down until all of them have gone back to where they were before. Inevitably there’s been quite a lot of value destruction, and many investors would not have been able to exit with all of their gains intact, and I’m sure several of them would have realized very significant losses. And we must wonder whether ever those losses are going to be recouped into the future.

So this is something that we’ve seen many times play out during investment histories. In fact, students of market history will see parallels here with things like the South Sea bubble, or the tulip mania from the Netherlands back in the 17th Century. And I’m sure it’s something that as investors we will continue to see time and again over the course of our investment lifetimes.

But that doesn’t meant to say that we have to sit back and accept it. Because as they say in investing, a share price is worth two things: either the discount of some future cash flows, or what somebody is prepared to pay for it. And in this particular episode that we’ve just witnessed, these individual investors were exploiting the fact that there was somebody else out there who was prepared to pay more.

But inevitably, once that disappeared, the share prices have reverted back towards a much more fundamentally justified share price valuation based upon the company’s cash flows; the fundamentals of the company concerned. And as investors we feel that it’s those fundamentals, really, that provide us with a much more solid foundation upon which to build long-term sustainable shareholder value, because we know that over the long term it’s the fundamentals of businesses that is the single biggest determinant of that value creation.

So by having in place processes, checks and balances, and disciplined portfolio construction, we hope always to be focusing on those company fundamentals, on these drivers of sustainable long-term shareholder value creation, and try and avoid the biases that comes from focusing on fear and greed, which can create a volatility, but as we’ve seen in this recent episode just concluded, often doesn’t result in any realistic fundamental gains over the long term.

I hope that’s been of interest, and I look forward to catching up with you again soon.