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Taught by Turmoil

Adam M. Grossman

MARK ZUCKERBERG and Elon Musk have been trading barbs in recent months, going as far as discussing a “cage match”—a literal fight.

This has followed a volatile few years for their respective companies. In October of last year, Musk took over Twitter and immediately started making changes. He fired 80% of its staff, causing an uptick in technical issues, and has made other spur-of-the-moment changes to the service. This has scared away advertisers, prompting a 50% drop in revenue. Not helping matters, Musk’s public statements have become increasingly unusual.

Zuckerberg’s company, meanwhile, has suffered its own series of mishaps. Trouble began 18 months ago when The Wall Street Journal ran a series of investigative reports dubbed “The Facebook Files.” Working with a whistleblower, the Journal published a number of damaging accusations.

Around the same time, the company announced a strategic shift, investing in a new concept called the metaverse. Signaling its commitment, Facebook even changed its corporate name to Meta Platforms. The new strategy was poorly communicated, though, and initial metaverse demonstrations were met with mockery. Adding to these troubles, in 2021, Apple made a change to its iOS software that hurt online advertisers, including Meta. In combination, these events caused Meta’s stock to fall 75% from its peak.

What can investors learn from all this? I see six lessons:

1. Public perception. In recent years, Zuckerberg’s reputation has made a significant roundtrip. As recently as 2017, serious news outlets were speculating that he might make a run for the White House. But just a few years later, the tide shifted. Opinion pieces began to refer to Zuckerberg as “public enemy No. 1,” and that perception seemed to extend to his company as well, helping to drag down its stock. More recently, however, much of that negativity seems to have faded. Meta’s ad business has been recovering, as has its stock, and public perception has improved.

Investor and author Howard Marks once wrote that, “In the real world, things generally fluctuate between ‘pretty good’ and ‘not so hot.’ But in the world of investing, perception often swings from ‘flawless’ to ‘hopeless’.” Meta provides a perfect illustration of this.

The lesson for investors: When making decisions, it’s important to maintain an even keel in the face of extreme points of view. This applies not only to individual stocks, but also to opinions on the state of the overall market and of the economy. Those making the most dramatic pronouncements often get the most attention, but it’s usually those offering more moderate commentary who end up being more accurate.

2. Innovator’s dilemma. Size can work to a company’s advantage. But at a certain point, it can become a disadvantage. I’ve discussed before the concept of the innovator’s dilemma—how successful companies can become vulnerable to upstart competitors if they focus too inwardly. That’s what caused BlackBerry to fail, for example. But here’s the challenge: It’s difficult to know when or if that phenomenon might occur.

In addition, companies often go through phases. Microsoft, for example, went through a period of malaise between 2000 and 2013. Its stock was essentially flat throughout that period. Many counted it out, seeing its technology as outdated. But since then, under a new CEO, the company has staged a comeback, with its stock up almost 10-fold.

Bottom line: The innovator’s dilemma explains a lot of what happens in business, but it can only explain it in hindsight. It can’t tell investors when or if a company might hit a downtrend or an upswing.

3. Surprises. A few weeks ago, Meta released an app called Threads. It bears a strong resemblance to Twitter and is intended as a direct competitor. This has helped boost Meta’s reputation and its share price. The lesson: In the absence of inside information—which is illegal—it’s impossible to know what a company has up its sleeve.

Right now, in fact, Twitter appears to be in disarray while Meta appears more organized. But just as Meta had Threads up its sleeve, investors don’t know what Twitter has in development, and how that might affect its value.

4. Turning points. There’s the expression that it’s darkest before dawn, and there’s a lot of truth to that notion. When everything looks bleak and seems to be going wrong all at once, that’s when corporate leaders really roll up their sleeves. That’s when the board tends to step in, when executives are replaced, or when product lines are shut down or sold off. And that helps to pull the company—and its stock price—out of a slump.

But here’s the challenge: Turnaround efforts don’t always work, and that’s the hard part for investors. Yes, it’s often darkest before dawn, but that’s another thing that’s only possible to see in hindsight.

5. Turning slowly. In 2009, during the depths of the bear market, longtime investment leader Jeremy Grantham offered a variation on this theme. He noted that “the market does not turn when it sees light at the end of the tunnel.” Instead, it turns when things are still dark, but “just a subtle shade less” dark than the day before.

Meta has demonstrated that phenomenon this year. First Zuckerberg stopped emphasizing the metaverse in public comments. Then he stated that 2023 would be “a year of efficiency”—that the company would be reducing headcount and other costs. Next came improved earnings numbers. And then came the Threads release. The lesson: Because change is often incremental, it’s hard as an investor to take advantage of it. In other words, no one makes a formal announcement when a stock is about to begin a monthslong rally.

6. Impossible math. When an investment goes into free fall, some investors justify unloading it, even when it’s down, by pointing to the math. After a 50% drop, for example, a 100% gain is required to get back to even. This implies that it might take an extraordinarily long time for an investment to recover, and that it’s therefore not worth hanging on and waiting.

But as we’ve seen with Meta’s stock this year, even triple-digit gains can happen quite quickly. Meta’s share price is still below its prior peak, but it’s made progress more quickly than investors might have guessed. (Full disclosure: I’m a longtime shareholder of the company.)

The bottom line: Stock prices are rarely predictable and rarely move in a straight line. Instead, they’re subject to the phenomena described above, and many more. That’s why I believe it’s a better bet—for most investors most of the time—to stick with index funds.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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