I don't know about you, but reading my social media feeds this week has been a polarising affair. Half of the people I take seriously predict we'll soon be in a recession, and the other half are predicting that good economic times are ahead!
Although my personal outlook is optimistic (recessions can do 4-5x more damage than inflation, inflation is the lesser of two evils), I'm no Nostradamus (does that make me Yestradamus?).
Whilst there is high uncertainty as to whether or not the economic outlook is bullish or bearish, one thing feels certain: we're in for a period of high volatility.
For the majority of issuers, volatility is bad. The equation, "high volatility = low stability = negative market signals", seems to be an ingrained belief around these parts. Whilst upwards volatility has its obvious benefits, the negatives press coverage and investor sentiment during selloffs appears to outweigh the positives.
Today, I want to flip the script on your perceptions of volatility and present some research that presents volatility as a step-change opportunity. This article is about the benefits of volatility and how you can harness it to grow your market cap and raise better capital.
In 1986, American economist Robert C. Merton identified an intriguing characteristic of the Efficient Market Hypothesis (EMH). For those needing a refresher, EMH is an economic theory that dictates that a share's price reflects all known (and, in some cases, unknown) information about a stock. The more data we have, the more accurately we can price the stock.
Merton identified a subset of stocks called "neglected stocks" that do not receive as much investor, analyst, or media attention. As a result of their neglect, applying EMH means that the relative lack of information regarding these stocks means that they're likely to be incorrectly valued. In other words, the market's valuation of these stocks is akin to valuing the antiques you inherited from your great grandma. Until you go on Antiques Roadshow, you will have no idea.
With a small shareholder base and low trading volume, neglected stocks can result in companies being undervalued or overvalued for long periods. Many CEOs I speak to think that their share price is too low, and looking at Merton's work, we can now articulate why: not enough people know about the company!
In 2017, two Swedish researchers with, quite frankly, some badass surnames, discovered that if you're a neglected stock, you want volatility.
Jankensgård & Vilhelmsson found that when neglected stocks experience high periods of volatility, the increase in investor, media, and analyst attention can kickstart the Efficient Markets Hypothesis to create a "fair valuation" of the stock. The argument is that volatility is like the makeover reveal scenes in Beauty and the Geek. Whilst we’re all shocked at the transformation of the "geeks", their mothers insist that they always knew how handsome they were.
The takeaway from this research is that if you feel like the market is undervaluing you, then you may just not be getting enough attention. Periods of volatility can short circuit the market's attention and give your long-term share price a makeover.
As usual, I'm here with the experience of 2,000+ transactions and over $1bn in supported market cap to give you some practical tips for harnessing the power of volatility:
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