Head of Editorial Content
Strategy & economics
Andrew Oxlade considers the impact of social media on markets and how investors should react
News has always moved markets and those first in the know can, in theory, gain an advantage. This is a constant. What has changed – and beyond all recognition in the past century – are the methods of distributing news.
Consider one of most significant stories of the 20th century – the sinking of the Titanic.
The disaster occurred at a significant time in the development of communication, with the spread of wireless telegraphy. So when the world’s largest liner struck an iceberg on 14th April 1912, a signal station in Nova Scotia, owned by Lloyd’s of London, was first to know, and two days later, with some newspapers still reporting that the liner had survived, trading of reinsurance was well under way at Lloyd’s.
Now jump forward 105 years.
On 5th January 2017, Donald Trump (@realDonaldTrump) tweeted an abrupt warning:
Shares in the Japanese carmaker lost US$1.2 billion within five minutes, and Trump has become the symbol of how politicians can move markets via social media.
In investment circles, Twitter, with its 320 million users worldwide, has replaced the stock discussions of investment chatrooms and forums that became so popular during the dotcom boom and bust. Trump’s impact is a given, when his missives can move the shares of the world’s biggest companies. But his following of 25 million is surprisingly modest in the big picture. He doesn’t make the “most followed” top 10, while @Barack Obama has far more followers at around 80 million.
MarketWatch recently published a list of the top 50 “fintweeters”. The likes of the legendary investor @WarrenBuffett, who could be hugely influential with 1.24 million followers, didn’t even make the cut, perhaps because he has only ever published nine tweets. The number one fintweeter was German financial journalist @Schuldensuehner.
The power of views from individuals is one thing, but social media can also yield trends.
Imagine being able to accurately measure collective changing attitudes to products or spot new brands rising in popularity.
Various start-ups have tried to devise tools to capture these swings in sentiment, with mixed success. They have also attempted to try and detect changes in public mood that may affect the economy or the start of some societal trend that could affect stock markets. Stand-out successes from this sort of analysis are rarely reported.
Others tools have attempted to measure sentiment and social media mentions for actual stocks rather than their products. Sentifi, one such company, calls this “crowd intelligence”, detecting which stocks are hot and which are not.
In truth, it is hard to accurately capture trends in a way that can translate into investment returns, and single tweets are impossible to anticipate, even once made, the outcome is uncertain. When Trump berated Nordstrom, a US$8 billion clothing retailer, for dropping his daughter’s clothing range in February 2017, the company’s shares, which had fallen since the election, rose.
Social media websites can help improve your understanding of the world. But for sensible long-term investors, trading based on single tweets is high risk. Benjamin Graham, one of the investment greats of the 20th century, said: “The individual investor should act consistently as an investor and not as a speculator.”
A simple approach to investing is to buy, hold and ignore the noise of daily news, wherever it may come from.
This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.