21st Century rumour mill

I was watching Gold last night (the BBC re-telling of the Brinks-Mat robbery) when the smelter, John “Goldfinger” Palmer, was in Spain, sat by the pool, completely oblivious that his face was on the front page of every UK newspaper as Britain’s most wanted. His wife was reading the Daily Mirror, but as she said (script signposting) the paper was two days’ old. This was the 1980s, of course, and papers took that long to get to holiday resorts in Southern Europe.

My first trip to Europe was in 1973. If you phoned home, the recipient would expect you to announce a death. This’s because you would have had to book the call probably a day in advance and pay about £5, a week’s wages in those days, for 30 seconds battling with a high-pitched whine as background noise that you would be hearing for weeks.

Trigger warning for anyone under 35 reading this: we had no mobile phones, the newspapers were days old and the only contact with home was a postcard that would arrive two weeks after you were back at work. It was heavenly.

Last week I was 4,000 miles away on a sunbed reading about the worsening situation at Silicon Valley Bank (SVB) – the lender has, of course, now failed – WhatsApping with my team. I then called them (for free!) on a crystal-clear line (on a Sunday evening!!) before getting on a flight home so we could agree our plans for Monday morning market opening. Tracey (Mrs C) was not overly impressed.

While we were sat in the airport lounge on Sunday, two retired English couples sat on the next table were discussing the SVB crisis and the possible implications. Everyone was up-to-speed on the latest updates as they played out in real time. How did we get here?

Always on

Social media and digitisation of news is, of course, how we got here. Every drama is now a crisis and very quickly spreads fear and confusion. Instant news needs instant reaction, which – and let’s be kind here – is often rubbish.

The added problem is that we can act pretty quickly too. Bit worried about the bank? Just go onto your app and transfer the cash in an instant. Photos of queues at bank branches get lots of clicks, but sadly it’s very analogue and ludicrous these days. You don’t see the invisible ‘queue’ of depositors who see the headlines and start moving with their digits. 

This seamless and frictionless access to information and financial services is really, super helpful day to day. But the last few days shows how it can be seriously unhelpful when panic sets in. It’s something our team has been taking very seriously for some time when reviewing companies we hold or are thinking about buying. A single viral comment that’s negative about your company can destroy decades of brand value in days. A bad review or a cacophony of shared poor experiences can seriously damage your revenue growth and your share price.

This is one of the reasons that we have tried to avoid companies which have a reputation for poor customer service and unreliable products. But now we need to consider social media as an accelerant for macroeconomic risk, too. The problem is that no risk system can do this. We can stress test a portfolio for the 2008 crisis, for what happens if oil prices rise to $200, or how we should fare if inflation jumped to 20%, and we could be in the ballpark. But nothing on earth can measure the impact of a social media rumour creating fears of systemic risk in a sector of the economy. 

Rumours spread like wildfire

Of course, this is bad enough when the underlying facts are as reported. The bigger problem, in my view, is the opportunity for bad actors to start rumours to move share prices or bond yields.

Thirty years ago, rumours used to go around the City on Reuters terminals and move prices to create trading profits. This is, of course, market abuse and illegal, but it went on. These days electronic messaging across market systems are monitored and there are full audit trails.

But with social media, we all have Reuters terminals now, including the bots. And this increases risks so, so much. This is a global issue and not easily legislated for, let alone monitored. What’s to stop market abuse in this world? Policymakers and regulators need to start looking at this and fast. Mischievous and manipulative rumours, coupled with the rise of algorithmic and quantitative trading strategies (where robots scrape the internet for data and invest automatically), create serious volatility and even permanent loss of capital.

So what can we do as investors? You have to step outside the noise chamber and stop reading all the ‘stuff’. We try to look at the real facts in each case and the potential read across to other assets. Often other assets will fall in sympathy due to the fear impulse, which creates opportunities. The mismanagement in SVB’s case, for example, is not indicative of the entire sector. Assuming it is makes little sense. The same can be said of Credit Suisse. Companies get themselves into trouble in their own ways, and often there are more differences than similarities in their predicaments, even when they are in the same industry and struggling at the same time. You need to analyse these stocks’ situations – and their impacts on peers – on a case-by-case basis.

For our Multi-Asset Portfolio Funds, we’re not adding to the regional banks that have found themselves in the market’s crosshairs, even though they do look interesting from a trading perspective. The bet is simply too binary here and prices are being driven by irrational behaviour that you cannot analyse. However, we are adding to other financials which have also fallen, maybe not as severely, as we feel the risk is temporarily mispriced and we should be well rewarded over the coming months. Remember, it’s the uncomfortable trades that are often the most profitable. We added to American investment bank Morgan Stanley, US stockbroker Charles Schwab and UK life assurer Legal & General, for example.

The days of getting away from it all are over, I’m afraid. We’re always connected and instantly available. A good thing? I’m not so sure. But I am certain that the social media rumour mill is here to stay and we must factor it in to our investment processes. In some cases, the rumour could destroy a business with no basis of fact. A sobering thought.

Tune in to The Sharpe End — a multi-asset investing podcast from Rathbones. You can listen here or wherever you get your podcasts. New episodes monthly.