Author: BhartiyNiveshak

There is wisdom in the crowd. Sum of the parts becomes better in such case and beat any individual brilliance. That is the idea behind market. Batters of free market idea, including us, rely on this fundamental concept. If you see the crowd there is everything – utter madness, stupidity, mediocrity, brilliance, godly wisdom. But if you aggregate these vectors then most of the things cancel out leaving the wisdom of the crowd which does not suffer from individual issues. That is why most of the time you are better off trusting market – the price action that you see on screen.

Let’s look at this chart of Dr Reddy – CMP 5229. MCap 87,000 Cr.

7 Point Price Action Story –

1. Stock made top alongside all big pharma names in Indian market .

2. Stock declined and tried to take support and looked like it can bounce from here and many Individual investors make this mistake and get stuck for years, become long term investor. Do not do that. We will take a zoom at this point later.

3. This is where actual bottom was made and bad news is it would be hard for anyone to get this right. But good news you do not have to know the exact top and bottom to make returns which will be great.

4. This is where stock attempted to make the upward move but failed just touching the previous base.

5. Stock went into mode which could benefit. Once stock crossed that Pink line on chart it was well above MAs and 50 SMA above 200 SMA signifying return of momentum. But soon corona came and stock went to as low as 2500 from 3300 – a 25% drop from the peak which is much less than the wider market. This is a sign of what lies ahead. As and when market bounces you can expect this will be one of the first few big liquid name to do good. And this exactly what happened. In April starting stock was trading above 3300 which was pre corona highs. Soon stock started challenging the previous high made in 2016.

6. Stock did eventually crossed the previous pharma bull high to make new high and then at point 6 it retested as highlighted in the chart. This is where the news of Sputnik V vaccine and DRL’s role was published.

7. At this point around 5000+ stock is a buy for core portfolio as it has made new highs and is a pharma name. On top of all that it is vaccine play so even if market breaks down it will have much less impact on this stock. Also, in previous corona fall while market fell much more this stock fell only 25% signalling the relative strength. This can be a great stock for next 1 year or so to have in portfolio. You can avoid putting SL too and exit whenever you like based on other considerations as opposed to SL.

Let’s zoom in at point 3 –

When you see left hand side is half mountain followed by a big red candle(a big drop) consider it as game over of this run. Do not attempt to buy such fallen stars thinking that you are getting same stuff cheaper now. You will be repenting the decision of buying here for years and in many cases price may not recover ever. You can find many such examples for this pattern. In such cases just sell and forget about the idea for few years.

Let’s get back to Dr Reddy and how things are. Question is how would any individual know that there will be any vaccine talks after first half of 2020, how would anybody know that Dr Reddy will have role in that? If nobody could have known this then how such a big liquid name fell only 25% while market fell as much as 50%? And then within some 10-20 days stock made new high while market was still languishing? If this is not the perfect example of wisdom of the crowd that market is, no idea what else could be.

If we go global and try to see this concept and how market is able to price in information much ahead of any official inkling of what is going on then there are several examples. Let’s look at few of those here.

Moderna was one of the few stock which ran as much as 60%+ back in Feb 2020 signalling what we would come to know much later. Bill Gates had guessed that possibly 2 out of seven would be good enough candidate for vaccine and market has priced in very early who these two will be in Moderna and BioNTech. That is what market does. In Oct 2020 much before any efficacy data for vaccines was released Pfizer and Moderna ran hard. No way anybody could have known that 95% efficacy is going to come out in early November. But market did price in even this information. Hard to make the case that anybody could have known if President of USA did not know it while all of this was being done in USA only.

If you look at 6 Nov when efficacy data came out, Pfizer is up by 9% and at one time as much as 23%. On the other hand Moderna still up by 93% since that day and at one time up by 130%+. What explains this difference in rise? Another perfection from market.

The difference was in case of Moderna vaccine people who were found with severe symptoms after taking vaccines have not really taken the vaccines but placebo(no chemical impact but told to person taking that it is vaccine to compare this with person who actually took vaccine). But in case of Pfizer, total 10 people reported severe covid – 19 and one of those has got the actual vaccine while 9 were under placebo. So not 100% protection in case of Pfizer. That is why Moderna ran so much more than Pfizer. And market did all this and priced it before any of this information came into public domain. There were many big Pharma such as GSK, Novartis, Astra Zeneca, Sanofi, Merck and of course Pfizer among many who were trying to develop the vaccine. But market was backing (by rallying stocks) only Pfizer, Astra Zeneca and Sanofi. Now we know the actual status and how it all turned out. Market had given its verdict much before experts could gather information, analyse and announce officially.

If you keep track of so called experts and their predictions you would see how wrong they are. But then who is doing that. Wisdom of the crowd is a process by which democracy functions, market works and many other smaller example. Market is not some Newtonian mechanics instrument where you can change one variable and controlling for others you can figure out the impact. Neither economy works that way nor market. And that is why most economists have horrible track record of predicting things and so is the case with market experts. These are multi variate systems which are called complex adaptive systems(CAS) which follows chaos theory. In this whole lens of CAS, central idea is you can not predict anything in advance but be nimble to change your response as reality unfolds. So you have to accept your ignorance and stop making any prediction and then you stand much better chance to succeed both while managing economy and as market participant.

Price is the reality and everything else is the opinion. Nothing matters if you are consistently wrong about the prices. You can be logical, analytical intellectual but it does not count for anything because participants are human with emotions. So forget everything focus on what market is doing and see how that can translate into reality. Market discounts the future not the past or present. It could be wrong but mostly it will be right about how future can unfold. Whenever it is wrong market is fast in making amends and does not take much time to correct things to reflect the alternate future.

Let’s take another example and ultimate one which is much researched to understand wisdom of crowd concept.

January 28, 1986 at 11:38 AM Space Shuttle Challenger took off and only 73 seconds in flight it exploded killing all seven members of its crew and fell into Atlantic ocean. A major embarrassment for space program of NASA and USA.

Then US President Reagan appointed a commission known as Rogers commission. This commission had members such as Neil Armstrong (first human to walk on Moon), Richard Feynman a Nobel laureate in Physics (not some political Nobel in Peace, Literature or Economics), Sally Ride first American women in space, Charles Yeager who was a legendary pilot and first ever to cross the sound barrier in level flight. Charles Yeager was the first pilot to cross the sound speed of 1 KM in 2.9 s while flying. He flew so fast that it took less than 3 seconds to cover 1 KM or more. This commission worked over five months and finally submitted the report. It found that O – rings were at fault in this disaster and there were four contractors who supplied O – rings that were used in shuttle.

Feynman demonstrated that O- rings were at fault by putting them in ice water. It also revealed that NASA manager did not understand the basic concepts such as Safety Factor and this got revealed due to Prof Feynman’s investigation which was becoming pain for Commission and Chairman Roger mentioned this in public too. You make a bridge on which 1000 KG weight can be carried but in reality you estimate that only 250 KG at maximum will ever be taken on this bridge. So Safety Factor here will be 4 (1000/250). But say you took 250 KG weight on it and it cracked. There is no collapse yet but crack. This will mean the Safety Factor is zero here. It was not supposed to crack till 1000 KG but it did at 250 itself. This is what NASA managers got wrong. Feynman during this episode remarked,” For successful technology, reality must take precedence over public relations, for nature cannot be fooled.”

Let’s get back from fascinating subjects of space travel and shuttles etc. So it was 1986 without internet and certainly no social media, no WhatsApp, no Telegram. Event was televised but nobody had any idea what has gone wrong and why.

How long do you think market took to price in this disaster? Think before reading further.

Market did not wait for report to become public. It did not require submission of report. Forget submission it did not require the demonstration done by Prof Feynman either. All of these things took months.

Market actually priced in this disaster by 11:52 AM on the same day event took place barely after 13 minutes. That’s right. Market did not take even 15 minutes to price in this event. One of the four contractors of those O – rings was Morton Thiokol – a public listed company on New York Stock Exchange.

After 13 minute of that disaster NYSE had to halt the trading in Morton Thiokol as stock had hit the circuit and once opened it was down by 6% and by closing of the day it was 12% down.

If you take 3 month average volume that day it was 17 times more traded. In other three contractors – Lockheed, Rockwell and Martin Marietta fall was much lower and volume too was much lower. You may want to argue that NASA and people working in Morton Thiokol knew about this but then you can not explain away the 17x large volume and no insider trading issue was found either. All of these findings were published in a paper by Michael T. Maloney and J. Harold Mulherin in 2003.

Your head will start spinning if you know that market cap of Morton Thiokol reduced by around $200M on that day by closing and this is what they had to pay in terms of settlements, damages and lost future cash flows in reality later. How’s that for market pricing in the events in real time?

This example demonstrates that what took months for some of the brilliant minds of that time as part of Roger Commission to investigate and establish the cause of disaster, stock market which works on principle of wisdom of crowd did it in matters of few hours. And that too without any Scientists, Pilots, Astronauts, Physicists, Nobel laureate, Air Force Generals etc.

If you are interested you can research more and share with us what you find.

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