The Alibaba Lesson: Why Price Matters More Than Narratives
The chart of Alibaba offers a valuable lesson in investing, particularly about the risks of relying solely on narratives and external analysis. In late September, a surge of optimism swept through markets as institutions like Goldman Sachs upgraded their outlook on China, projecting significant upsides. Investors who followed these reports may have witnessed Alibaba’s stock rise from $85 to $118, only to see it plummet back to $85 within weeks.
The Risks of Following Narratives
Imagine the plight of those who read glowing reports about China in early October and decided to invest at the peak of the hype. They are now sitting on significant losses, with the stock dropping as much as 30-40% from its recent highs. This example underscores a critical truth: by the time most retail investors hear a narrative, much of the movement has already played out. Often, such reports are either outdated, overly optimistic, or even plain wrong.
The Reality of Fund Manager Performance
It’s worth noting that most fund managers fail to outperform the market over the long term. Studies show that 70-80% of fund managers do not beat the indices over a decade. Despite bold claims of market-beating strategies, many fail to deliver consistent results. This raises questions about the reliability of institutional analyses and their accountability. Firms like Goldman Sachs and others frequently issue strong recommendations, but how often do these predictions prove accurate? Rarely is there a thorough record of their hits and misses.
Reading Between the Lines
A common practice among analyst firms is to take strong positions in certain stocks and then create narratives to encourage others to follow. While this isn’t unique to any one institution, it highlights the importance of reading between the lines. By the time a strong narrative reaches the public, significant gains may already have been made, or the peak might already have been hit, as was likely the case with Alibaba in October.
The Importance of Watching Price
Those who track price movements have a distinct advantage. Price action often reveals the reality behind the narrative. In Alibaba’s case, savvy investors observing the price might have noticed early signs of momentum. Similarly, as the stock began to decline, they could have exited before losses mounted. In contrast, investors who relied solely on the narrative might have bought near the top and found themselves trapped as the stock fell.
Price and Narrative: A Double Confirmation
The key takeaway is to prioritize price action over narratives. Narratives can be compelling but are often late or misleading. Instead, let price movements guide your decisions. If the narrative aligns with the price action, it serves as a double confirmation, adding confidence to your strategy. Always remember, the market doesn’t reward beliefs or opinions—it rewards actions based on objective data.
Invest wisely, keep an eye on price, and ensure your decisions are guided by facts rather than hype.
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