Peter Hillier: Tweets rock the market

News has always moved markets and is therefore critical to investors. This is a constant. What has changed – and beyond all recognition in the past century – are the methods of distributing news.

Consider one of most significant stories of the 20th century – the sinking of the Titanic.

The disaster occurred at a significant time in the development of communication, with the spread of wireless telegraphy.

So when the world’s largest liner struck an iceberg on 14 April 1912, a signal station in Nova Scotia, owned by Lloyd’s of London, was first to know, and two days later, with some newspapers still reporting the liner had survived, trading of reinsurance was well under way at Lloyd’s.

Now jump forward 105 years. On 5 January, 2017, Donald Trump tweeted an abrupt warning to Toyota Motors.

Shares in the Japanese carmaker lost $1.2 billion within five minutes, and Trump has become the symbol of how politicians can move markets via social media.

In investment circles, Twitter, with its 320 million users worldwide, has replaced the stock discussions of investment chatrooms and forums that became so popular during the dotcom boom and bust.

Trump’s impact is a given when his missives can move the shares of the world’s biggest companies. But his following of 25m is surprisingly modest in the big picture. He doesn’t make the “most followed” top 10, while @Barack Obama hasaround 80m followers.

MarketWatch recently published a list of the top 50 “fintweeters”.

The likes of the legendary investor @WarrenBuffett, who could be hugely influential with 1.24m followers, didn’t even make the cut, perhaps because he has only ever published nine tweets.

The number one fintweeter was German financial journalist @Schuldensuehner.

The power of views from individuals is one thing, but social media can also yield trends.

Imagine being able to accurately measure collective changing attitudes to products or spot new brands rising in popularity.

Various start-ups have tried to devise tools to capture these swings in sentiment, with mixed success.

They have also attempted to try and detect changes in public mood that may affect the economy or the start of some societal trend that could affect stock markets. Stand-out successes from this sort of analysis are rarely reported.

Others tools have attempted to measure sentiment and social media mentions for actual stocks rather than their products.

Sentifi, one such company, calls this “crowd intelligence”, detecting which stocks are hot and which are not.

In truth, it is hard to capture trends accurately in a way that can translate into investment returns, and single tweets are impossible to anticipate, even once made, the outcome is uncertain.

When Trump berated Nordstrom, a $8 billion clothing retailer, for dropping his daughter’s clothing range in February, the company’s shares, which had fallen since the election, rose.

Social media websites can help improve your understanding of the world. But for sensible long-term investors, trading based on single tweets is high risk.

Benjamin Graham, one of the investment greats of the 20th century, said: “The individual investor should act consistently as an investor and not as a speculator.”

A simple approach to investing is to buy, hold and ignore the noise of daily news, wherever it may come from.

Peter Hillier is portfolio director at Cazenove Capital.

This article appears in the SUMMER 2017 edition of Vision Scotland. An online version can be read here. Further information about Vision Scotland here.

*Nothing in this article should be deemed to constitute the provision of financial, investment or other professional advice in any way. All data contained within this article is sourced from Cazenove Capital unless otherwise stated.