The Alarming Trend Of Influencing Asset Prices

Most traders and fund managers try to forecast asset prices. But a few market participants influence the direction of asset prices, if not determining it outright. A forecaster that goes against an influencer usually gets crushed. This is an alarming trend mainly due to the advent of social media and something must be done.

Free expression of ideas is a constitutional right but when it comes to markets there are certain checks and balances that prevent using free speech in malicious ways and especially in an attempt to profit at the expense of other market participants. Disclosing asset holdings is important for those who make public statements about the future course of prices of securities and financial assets in general.

However, the disclosure requirement may not be sufficient to protect the public from a malicious influencer unless accompanied by a commitment of not selling an asset in case of a long position, or buying it back, in case of a short position, in a sufficiently long period of time. However, this also appears far from sufficient to protect the public.

If someone has 100 followers in Twitter and tweets that stock XYZ will rise or fall, there is zero influence on price. But if someone has 500K followers and does the same, there is potentially influence, in most cases genuine, but this can also be an attempt of manipulation. Note that some influencers are credible and just try to assist the public while others only try to advance their position. However, assisting the public with financial decisions should be the job of a registered financial adviser and not of an influencer in social media.

It appears that the investment world has turned into a jungle. The forecast of a quant about the returns of stock XYZ in the next three months can be invalidated by the tweet of an influencer. In the days of printing press, radio and TV, financial information was disseminated by certain individuals who were scrutinized. Nowadays anyone with a fancy avatar and many paid followers can pose as an influencer and attempt to manipulate asset prices.

Influencing asset prices using social media is a growing trend. I have no idea if authorities are aware of its impact, are working on this problem, or whether they have given up. Below is how I deal with this growing problem. Please do your own homework and/or consult a competent financial adviser.

  • I avoid securities and assets popular to influencer circles. Usually large moves and profits occur when no one expects them. For example, the bitcoin 10K to 100M story is over now. A 100% return may be possible at high risk but too late for 10000%. Same holds for AMZN and the 45000% story.
  • I never pay attention to calls about short positions. The probability of getting squeezed out is close to 100%.
  • I never try to outsmart influencers by betting against them. They can influence the public for longer than I can remain solvent.
  • Statements of the form “If you have bought this asset, you would have made x% in the last N years”, where X is a large number, are usually made with the objective of inflicting feelings of regret and self-inadequacy to a target group so they can become loyal followers. Best response is blocking anyone who does that.
  • Finally, I spend more time doing my homework than in social media. This can save a lot of trouble and exposure to all kinds of influencers. I usually unfollow, mute or block anyone who uses the world “influencer” in a profile. In most cases, I know I am dealing with a wannabe. True experts do not need these labels.

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