The current fluctuations of certain stocks have proven over time; that with the greater interconnectedness that the technological advances offer, comes a clearer realization that investors are taking into account feedback from various sources. (It appears the source is not as important as the content).
Rumors are becoming a greater threat to the firm, even if they are not substantiated by facts. It is also clear that the stories expressed through these rumors, when attached on the state of operations and future plans carry great weight on their investment decisions. What the investor focuses more on is better understanding the business dynamics and intangible factors like management transparency and capability, innovation, initiatives etc. Tangible evidence like balance sheet health takes a back seat.
If you ignore market psychology and investors’ behavior you run the risk of making correct decisions in theory but not panning out as well in practice. Take for example the right decision; in theory, to reduce your market risk exposure. In practice; however, without the right communication to the market of the benefits of your actions it resulted in a fiasco, where the stock has suffered, and in many instances trading at 50% of book value!
So this underperformance is not due to the bad execution of the plan as much as it was the lack of the plan to be adequately communicated. You need to foresee the reaction of the market to the new and different issue that does not fit the mold of past issues.
Don’t get me wrong, a behavioral strategy and better communication skills does not promise utopia, nor a solution to all problems of underperformance. And it surely does not propose a finished blueprint for the future. But great earnings results neither drew the big picture nor addressed the big issues that one would think was needed to be stressed to the broad audience.
With that said, I believe financial firms are starting to break out of the vacuum and spend more capital on analysts researching the behavior of investors and executives attempt to mold investors’ perception towards better understanding the company operations rather than sitting idly hoping for a favorable outcome. We just have to wait and see if we see a recovery of the sector performance that could as a whole, experience the Cinderella story….