Narratives in the Stock Market

This post was hard for me to articulate. I started it over 6 months ago and let it sit and percolate while I moved onto other posts hoping for something to come to mind to help me describe the idea in a more engaging way. It goes without saying that these are all just my opinion.

You likely have some sort of internal narrative, I know that I do. A hero, an underdog, an intellectual, etc. It drives you and the decisions you make, some consciously and some unconsciously. I’m not talking about things like “I don’t like math cuz I’m a Leo” or “I’m scared of dogs because I’m INJT” or whatever. I’m talking about your internal personal narrative that you tell yourself to help guide your decisions. 

I believe the stock market has narratives. There are broad, longer term narratives and there are company specific narratives. These narratives drive market participant behavior. They can drive a company's stock to unsustainable levels whether it’s high or low. I try to understand what the narrative is for my businesses (if there is one) to help with my decision making. This would be similar to “what’s priced in” or what are the expectations for this business.

There are all sorts of ways to try and tease out the narrative of the company. Raw data like the trialing valuation, analyst estimates, other participants, posts on X, the company itself, are just a few. I do think there is a minimum amount of market participants required to build a narrative for a specific company. How much, I don’t know. 

Today’s Narrative

We continue to experience a long ass run in US mega/large cap (mainly technology companies). Every time you think it might be done; it just keeps going. These businesses are experiencing scale at levels we have never seen before. AAPL, GOOG, AMZN, NVDA, MSFT, META, and some “compounders” like CSU, TDG, SHW, have a long runway (I have no opinion on these specific companies). The business momentum will continue due to the type of businesses. That’s the narrative as I see it.

I would also say a narrative is that inflation is under control at the moment. The data currently backs this up.

What’s Your Point?

What does this all mean for your personal stock picking? I think it's valuable to try and understand what is “priced in '' and if you are comfortable paying the current multiple. That’s why I tend to gravitate to low multiple stocks with some hair on them. For my IQ, I think I’m more likely to replicate the pattern of finding a company priced like it’s a “shitty” business that’s actually just a “typical” business. There is usually a big run in the share price when the narrative shifts from a shitty business to a less shitty or even decent business. I honestly have no idea if or when the narrative shift will happen in the companies I invest in. 

Narratives in My Portfolio

In my portfolio I have two names that I think are in the crosshairs for the narrative that GLP-1 drugs will permanently disrupt the amount of patients requiring their products and services. The companies are QIPT and VMD. I have gone into some detail that I feel that the market is over reacting. Even though the businesses themselves are performing counter to the narrative in the short term, it doesn’t really matter because the market is assuming the impact will be several years away. There are other dynamics of the businesses that will lead it to fetch a specific multiple, but I think this narrative is the  largest driver right now. I could be wrong. Time will tell. 

Closing Thoughts

I go back and forth how much energy I need to put into understanding what the market thinks about specific industries. Certain positions will require me to understand the current narrative if I want to outperform, others won’t. Maybe I would be better just ignoring what the market thinks. 

There are people who really don’t pay attention to the market narrative. They also seem to find companies that likely have no existing narrative. It’s usually something very small and underfollowed. That works for them. And I have owned and will own companies like this. 

What do you think of the topic of narratives?

Thanks for reading.

Dean