Long-Term Investors Playing Short-Term Games
Last month Elon Musk tweeted two words – “Use Signal.” He was referring to an encrypted messaging app you can get on your phone. Signal is a private company meaning most of us can’t buy the stock. However, there is a company called “Signal Advance,” a completely unrelated biotech company that happens to share the same “Signal” name as the messaging app Elon mentioned. However, this company is publicly traded, meaning you or I could have bought it. Thinking Elon was talking about this healthcare company, investors mistakenly bought Signal Advance aggressively, increasing the price of the stock over 5,000+% in a few days. It went from a company worth about $50 Million to a company worth over $3 Billion (yes, with a B).
Then something even crazier happened.
Investors figured out that Elon was talking about a different company. But they didn’t sell. The price actually surged 400+% the following Monday after “much [had] been made about that fact that Signal Advance isn’t Signal in a number of new articles…”[i]
That’s right – after many investors knew the company was artificially inflated, they continued to hold it. Why? I would suggest that those buying the stock weren’t thinking “this looks like a sound investment that will be a reliable source of retirement income 30 years from now.”
They were probably thinking -
“I bet there is someone more irrational willing to buy this stock for just a little more than what I paid.” And that worked…until it didn’t.
Eventually the stock came back to planet earth. Fortunately, it happened quickly enough that I doubt many long-term investors were tempted into it.
But that is not always the case. During previous bubbles (dotcom crash of 2000, US Housing in 05’, Tulip Mania of 1500’s) short-term investors bought and bought, driving up the prices until finally the long-term investors’ curiosity was peaked, and they got in. And guess who is always left holding the bag? It sure isn’t the short-term investors - as soon as they see prices start to decline, they move on to another game entirely.
If you subscribe here, you’re a long-term investor. That means you will have to be diligent in not playing the game of the short-term investor. Some will win but the majority will lose. Don’t get caught holding the bag.
Thank you for reading,
Alex
This blog post is not advice. Please read disclaimers.
[i] DeCambre, Mark. “Why an Elon Musk Tweet Led to a 5,675% Surge in Signal Advance's Stock.” MarketWatch, MarketWatch, 11 Jan. 2021, www.marketwatch.com/story/why-an-elon-musk-tweet-led-to-a-5-675-surge-in-health-care-stock-signal-advance-11610400141.