People often tend to care more about stories than data or figures.
Markets are constantly changing and day-to-day there is always one story that moves markets, giving solid reasons to buy/sell in an easily understandable way. Stories are easy to understand, which means they have a large number of participants. The more listeners a topic has, the more influence it has. Facts & figures are powerful but are often overshadowed by narratives. Narratives can be positive or negative, but they have a big impact on the market. Market participants are under the influence of some narratives so much that they forget about everything else during the time these narratives are in power.
Narrative can be upheavals in forex markets, sharp movement in interest rates/inflation, rising/falling product/raw material prices, heavy fund buying/selling, good/bad prospects of some industry/company, debt defaults/ invoking of promoter pledge, delisting/hike in promoter stake, regulatory action, political events, etc. The sources of these narratives are usually news reports/chatter, expert & management interviews, and broker reports.
When one aspect of a story is focused on exclusively, it becomes over-emphasized. One problem with many of these portrayals of people is that they can be biased & one-sided. They often extrapolate good/bad trends from the recent past, to create a brighter/bleaker future. Narratives are sometimes made to distract people from the problems of the present for an exaggerated view of the future. Out of all the market-related talk, it’s best to focus on company/industry-specific stories as long as they’re based on facts and not fantasies.
The common argument that ‘the worst is over’ history has been used to help stocks go up, while the idea that “the best is over” history has been used to help stocks go down. Prices of most commodities go up and down. However, there’s usually always a long story behind the cycle which will help to justify the reasoning for why it went up or down. It’s quite common to see people making predictions on what will happen in the next decade or more and justifying their investments with these predictions.
Managers should make sure to use narratives that are appealing & convincing, as this will improve the company’s valuation. Most managers are skilled at managing tales and blame all negative occurrences on ‘temporary external factors’ while congratulating themselves on all positive events happening to their team. Analysts should be not only focused on their analysis but care enough to present a convincing story around their idea. The media often spreads the narratives created by analysts, market experts, and management without checking their truthfulness.
When liquidity is abundant, it’s easy to get people motivated to invest in a story or narrative that benefits them. When there’s less liquidity, then this flips and it becomes faster & easier to get people scared into dumping their stocks for a LAZY story or narrative. The narrative provides a strong & convincing reason to buy or sell and can get digested very fast.
As traders & short-term investors are only thinking about the next trade, they are more likely to evaluate company narratives. For long-term investors, it is important to think about the company’s health over a longer period of time before investing. It’s not just about looking at fundamentals, technicals, and valuation. Investors need to understand the company’s story in order to reach large gains. The narrative that a company puts out has the power to attract investors and their shares. So make sure you stick to stocks with a positive long-term outlook or where one can be created. The best way to make a profit is to invest in stocks where the narrative has not become popular and you can do research into them afterward. Investing in stocks that already have a lot of buzz around them leads to a high probability of losses.
Narrative is important as long as there are doubters and opposers.
In layman’s terms, the narrative is a reason why people will buy or sell. It’s their main concern. Financials can worsen, scrips can improve beyond what it should be worth and valuations may become rich. Still, the narrative can help them buy/hold on. Financials may be on a growth trajectory. The market may be undervalued or oversold. Still, the narrative of the company has authority over whatever happens with its financials and the market.
So don’t forget the story behind your investment. It can help a lot with keeping your confidence high. But make sure the story you’re putting faith in is of good quality as well to avoid any problems