Happy Wednesday RV community. I am developing a personal process for filtering 3–5-year value plays (I know, I know, value is dead). Interested in how a strong narrative can change investor behavior and diverge from real economic fundamentals. Specifically, how a narrative can warp future supply and demand estimates and pull that distortion into current equity prices. Would like to work it from the top down. Trying to capture real macro data vs. macro narrative and drill down to opportunities. Below are my steps. Looking for feedback – I have thick skin and open to all feedback and criticism. How can I make it better? I know this is probably basic for most of you, but I’m a newbie and trying to take advantage of this platform to refine my process. Thanks for any and all feedback!
- Identify and explain a specific and prevailing macro narrative. Is narrative driven by real economic fundamentals or perpetuated by hopeful (or incitive driven) influencers (i.e. media, motivated institutions, etc.)? Or an equal balance of the two?
- Which sectors are influenced by the narrative? Identify sub-narratives within the sector. Confirm association with macro narrative (i.e. Green/ESG narrative EV sub-narrative).
- How does a shift in the macro narrative influence sub-narratives? Does it shift the sub-narrative closer to or further from reality?
- Identify examples where the narrative has diverged from real supply /demand. Identify equities that have been overbought / oversold as a result of divergence.
- Deep dive equities to locate durable competitive advantage in oversold and poor fundamentals (or fraud) in the overbought.
- Identify equities on the margin (or outside the narrative) that could become relevant in a narrative shift.
The issue I have with narrative is it is always shifting. Take my beloved gold, the gold bugs are out in droves shouting "manipulation" when the price is falling. "why oh why is gold falling when the dollar is falling". When the price was going up I didn't hear people protesting "bullion banks are manipulating the price higher" or "why oh why is gold going up when the dollar is going up" <- this was most of 2019 but nobody complained about it.
As Sam said price leads the narrative. Gold bugs were making money so they didn't need anything to blame.
What are you "Grad Student"ing in?
Thanks Christopher! I work full-time as a law enforcement investigator and I am working on my MBA in Finance at night. I work a lot of OT so having to chip away one class at a time.
And to clarify, not trying to build a narrative based portfolio, but a portfolio that considers narrative. Value has had a rough go of it the last decade and I wonder if part of that isn't because macro is missing from their framework.
Was thinking last night about, as you and Sam point out, the concept of price moves narrative. I wonder if it isn't more complicated than that. Instead that narrative and price feed off of each other. And when you factor in indiscriminate passive buying and momo algo trading - it's like throwing gasoline on the fire. And when price and narrative diverge from real fundamentals, can opportunities be found in the inefficiency? Or when price and narrative diverge from each other?
For example, with your "beloved gold" (which I love as well and think will have its day in the sun). There has been a long standing inverse correlation narrative and price action of gold and DXY. But like you said, when they began rising together and the long standing narrative became divergent from the price action and inverse correlation - is that something you would want to be aware and have considered in your framework?
Maybe Sam is right! I could be making it more complicated than it needs to be! Thanks again for your feedback and hold on to that gold!!
I think this is where we diverge. I try and remove the narrative completely from my process, and it will be me showing you numbers to tell you the correlation has changed :)
I do it every day on here. I skim read a post and if it has no charts/numbers in it I tend not to read it.
The numbers tell the truth I am afraid and the narrative follows. Personal view.
Take the RVDB with Raoul on Friday and last night with Ed. "is this rally all just a dollar down move?"
Well SPX is currently slightly positively correlated, but the narrative is that it is all due to the dollar. It was 6 months with -0.96 correlation. It wasn't yesterday and the numbers will tell you that.
If you look at Gold the correlation is all over the place.
Good stuff, thanks Christopher! I haven't seen those RVDB yet, will definitely check them out. Interested in following your postings and thought process. For context, what's your typical time horizon?
Haha well that by necessity is the same as my answer above. I could buy something today because it is cheap, tomorrow it could get cheaper and I take a small loss. By Monday I could be short it :)
Well first, price moves narratives.
Second, to me what you try to do Sounds so complicated.
If you would like to have a narrative based portfolio check out the real vision bot portfolio based on the RV interviews.
Also take a look here where there are some frameworks from some of the most successful us investors.Perhaps mix n match a couple of them to build your own frame work?
https://exchange.realvision.com/post/useful-checklist-to-learn-from-copy-from-when-looking-at-equities-5fef6e2e535ca71e053291d1
Thanks for the feedback Sam and thanks for the link! I’ll check it out and see what fits in my toolbox.
@Jeremy Varughese even better than what I said.
Interested and would like to read more about this. Do you know of any good white papers or RV interviews on this? @Sam Colt
Honestly nope, maybe this twitter exchange: