Investment myths in a fast-moving stock market

[SINGAPORE] Welcome to the most volatile decade in recent memory – and we’re not even halfway through.

The 2020s have already recorded 440 trading days with daily stock movements of 1 per cent or more, according to wealth manager Ben Carlson. To put that in perspective, an entire decade typically averages just 507 such days.

Said another way, the 2020s have crammed nearly 10 years of stock market volatility into less than five years – an unusually heavy dose of ups and downs. So, if you feel the stock market is moving faster, you now know why.

When volatility teaches the wrong lessons

When markets are volatile, the common advice is to simply tune out the noise, but that’s easier said than done. The problem lies in the way our brain processes information. In the book Your Money and Your Brain, author Jason Zweig said our brains are wired to recognise patterns even when none exist.

Here’s the rub: It’s not a mechanism you can switch off at will. In other words, by watching daily stock price movements, you may be receiving the wrong signals and end up learning the wrong lessons. That’s a big problem as key misconceptions may start to take shape.

Take the sudden rise of China’s DeepSeek AI model back in January. When the news broke, AI-related stocks were hammered, with Nvidia bearing the brunt, suffering a 17 per cent fall in a single day.

Such a sequence suggests you need to react fast to avoid such a mishap. Furthermore, it also implies the need to instantly assess new developments and act to prevent further losses. But that’s not how it played out.

In both cases, investors were misled into thinking that speed is the difference between making and losing money.

The misguided need for speed

In the hours and days after DeepSeek became mainstream, the narrative quickly centred around the Chinese AI model’s development cost – under US$6 million.

Why was this figure important? This low expense stood in contrast to the billions of dollars US companies were pouring into artificial intelligence (AI) models and data centres, with Nvidia taking the lion’s share. Hence, the prevailing narrative suggested that the company would have the most to lose.

Yet, six months later, it’s becoming clear that the hasty assessment on DeepSeek is premature in more ways than one.

One, DeepSeek’s US$6 million development cost does not cover any prior research and experiment on data, architectures and algorithms. The actual cost is higher but unknown, effectively knocking out the main narrative.

Two, major tech companies such as Alphabet, Amazon, Meta Platforms and Microsoft have continued to pour billions into data centres. More importantly, much of this spending has flowed to Nvidia. For the past two quarters, the GPU provider reported revenue gains of 78 per cent and 69 per cent year on year, respectively.

To top it off, Nvidia shares have risen by 39 per cent from their January low.

In other words, those who were looking to save a few dollars by exiting fast ended up leaving a lot more money on the table. Simply waiting for a couple of quarters would have done the trick.

Avoiding the pitfalls of volatile markets

But if moving fast is not the answer, then what should investors do instead? In my mind, there are three useful guidelines to follow.

For starters, most major declines are accompanied by negative headlines. To be clear, it’s not about the bad news itself. The real problem lies in the avalanche of negativity that follows, ranging from detailed articles on what went wrong to podcasts and rapid-fire social media takes.

Amid the onslaught, any good news is buried and often left unmentioned. This predicament is best exemplified when Netflix lost a million subscribers in H1 2022. In the aftermath, the negative news was unrelenting, with many pointing to the crowded field of competitors and the lack of quality content.

Impatient investors reacted by dumping Netflix shares, sending the stock down by 75 per cent from its 2021 peak.

But here’s the truth: If you believe that you shouldn’t fall in love with a stock, then you should also accept that you shouldn’t fall into hate with a stock. Amid the pessimism, the naysayers overlooked the positives.

In particular, Netflix had a dual strategy in place to launch an ad-supported plan while cracking down on password sharing. Within six months, its new ad-supported option was launched.

By the end of 2024, the company’s subscriptions surpassed 300 million users, adding over 80 million new members since losing a million in H1 2022. In fact, if you zoom out and look at the loss of subscribers between January and June 2022, it would look like a minor blip in the upward trend.

The lesson here is clear. When everyone is eager to tell you the bad news, you have to look for the good news yourself.

Let time be the ultimate judge

Not every piece of news is worthy of your attention, even when everyone’s talking about it. So, here’s the next thing to keep in mind: There’s a limit to what you can focus on, so don’t give your attention away cheaply.

The current developments in the AI space are a good example. When OpenAI’s ChatGPT caught fire in late 2022, the reactions went on overdrive, prophesying on the future outcomes. The problem, however, is that the outcomes suggested often veer towards the extreme.

For instance, some commenters predicted the demise of Google search. The situation is further exacerbated by Microsoft’s launch of an AI-powered search.

When faced with such a dilemma, remember this: Let time be the judge. In my experience, disruptions do not happen immediately. In addition, there is always time for the incumbent to respond. Furthermore, the AI landscape could also play out in ways we cannot imagine ahead of time.

OpenAI’s recent deal with Google Cloud services is a good example. This outcome shows there can be more than one winner. You simply have to be patient and let time be the judge.

Get smart: There’s always time to add a winner

Much of the rush to act is based on the fear of missing out, that if you don’t invest now, you are sure to miss out on a huge winner in the future. Nothing could be further from the truth.

For instance, you could miss the iPhone’s launch by a decade and still net a nearly 470 per cent return by investing in Apple 10 years later.

Sure, the gain wouldn’t be as good as investing at the time of the introduction of the iPhone. But have you seen an unhappy investor with a 4.7x gain?

To summarise, as the stock market fluctuates, don’t let your emotions flutter along with the ride. Instead, keep these principles in mind:

1. It’s not about giving your attention to every single bit of news, it’s about figuring out which new development is worth your time.

2. It’s not about how fast you react to a new business development, it’s about whether or not these developments have a lasting impact. 

3. It’s not about whether you have a strong opinion on technological trends but whether you can validate these trends at the business level over a long period of time.

Simply said, let time do its work.

The writer owns all the stocks mentioned. He is co-founder of The Smart Investor, a website that aims to help people to invest smartly by providing investor education, stock commentary and market coverage