Recently, the WSJ published an interesting article called The Problem With Believing What We’re Told. It describes specific reasons why false statements are so often mistaken as facts, and furthermore, why “lies” tend to spread faster than the truth. It is hardly a stretch to relate this to investing, so we will use the article’s main points to make better investment decisions. Here are a few bullet points, originating from various studies, which explain why “fake news” spreads as truthful news so often:
- The tendency to assume truth before questioning
validity stems from our prehuman ancestors
- They formed beliefs about things they experienced with their own senses – if someone saw a tree, there was no reason to question the tree’s existence
- We tend to treat language as an extension of our senses, but this sense is more open to manipulation
- Attention/distraction play a factor in weighing
factual statements as true or false
- Given enough time and focus, people are efficient at evaluating factual statements
- When distracted though, they are more likely to remember false statements as being true—but not the other way around
- Repeating a lie can make it seem like the truth
- People are more likely to believe things as they were repeated, regardless of whether they were true or false
- In one study, it was shown the 3rd time someone hears a false statement, they are just as likely to believe it as a true statement heard once
- When pictures are attached, people are more
likely to believe fake statements
- If you show someone a picture of a giraffe saying it is the only mammal that can’t jump, they are more likely to forget about elephants and hippos, for example
- Adding unimportant details, such as vivid
language, spreads lies quicker
- Presence of emotional words such as hate, destroy, or blame act as an accelerant in spreading a message
Let’s kick off the application to investing with a trade that has caused much pain around Wall Street – Beyond Meat (BYND). On May 17, 2019, famed short seller Andrew Left of Citron Research tweeted “$BYND has become Beyond Stupid,” implying its valuation/stock price was too high.
Since investors might use this information to buy or sell BYND, it is relevant to judge the validity of this statement by the near-term performance of BYND. It is clear that Left is bearish on the stock with this statement (to be certain, the rest of the tweet mentions that he expects the stock to go to $65, from $90 at time of tweeting). Unless otherwise stated, most equity-related statements are made within the context of a relatively short investment horizon (as opposed to a longer term multi-year call).
With 20/20 hindsight, we know that Left’s recommendation to short BYND was a bad one…or a “false statement” in the context of this article. Three of the aforementioned five reasons were present. Of course, there’s the tendency to assume spoken word as the truth, stemming from prehuman times. Second, a tweet from a well-followed investing “head” like Andrew Left is constantly blasted on all mediums of exchange from the newspaper to CNBC, so “repeating a lie” was present. Lastly, his use of “beyond stupid” transformed the statement to a headline demanding attention. This added the factor of vivid and emotional language, which helped spread the news quicker.
In the last of many studies mentioned in the article, when asked to “assess the believability” of true and false headlines, participants were more likely to believe stories that confirmed their own prior views. But a simple change had a great effect: asking participants to rate the truthfulness of the headlines. Using this approach to gauge Left’s tweet – the bearish case for BYND – will prove to be quite helpful. Is it believable that BYND will depreciate? Sure, any bullish or bearish statement for a stock should be believable. But is it truthful to say that BYND will depreciate? No. As investors we know it is very difficult to predict that over a short-mid range time horizon…or any horizon for that matter.
Using the believable vs truthful approach is not the end of the this experiment though. Most comments about stocks are believable, and few end up “truthful.” So, the best approach is to gauge whether a comment has truthful roots, and then conduct your own due diligence. A well-known quote from John Maynard Keynes can be used to describe using valuation as the only factor in determining a stock’s direction: “The market can stay irrational longer than you can stay solvent.” In this case, BYND’s valuation remained “beyond stupid” longer than most shorts can hold their position. BYND rallied from $90 to $240 within a month of Left’s tweet.
If we take a step back to analyze statements made about stocks we’re interested in, assessing believability vs. truthfulness isn’t necessarily going to help us figure out which information is worth following, or “true.” It should help us avoid listening to outlandish statements without proper due diligence though.