Share Investing 102: Priced-in

You awake from your deep slumber after countless weeks in lockdown patiently awaiting your turn for the vaccine. You’ve saved quite a bit of money during the anti-social long haul and you decide you want to invest some of it. You try to think how you might be able to take advantage of the status of the economy. Things are looking optimistic. Border restrictions are being relaxed, shopping centres are flourishing once more. And so you ask yourself, “why not throw money at airlines and retailers?” You may alternatively read into the new Omicron variant and think to yourself, “I bet big pharma will do well next year, maybe I should invest in one of the major vaccine makers?” You explain your strategy to your mates and one of them smugly replies “priced-in”. What does that mean?

Retail investors and institutional investors

To properly understand what we mean when we say “priced-in”, you first need to understand who participates in the market. You can broadly divide up the investor classes into two groups:

  1. Retail investors are your mums and dads, the average Joe (or Josephine). We’re investing our own money on our own behalf or maybe managing funds in a family trust. Retail investors have very little impact on stock markets.
  2. Institutional investors are your top guns, your cashed-up heavy-hitters. Think superannuation funds, investment banks, hedge funds, private equity firms etc. These guys are investing money on behalf of other investors with (often) too much money to know what to do with themselves. Institutional investors are large enough to move the market with big block trades.

In this great big, globalised world with the internet at the fingertips of pretty much every individual in any developed country, information is pretty readily-accessible. Now you may use the internet to look at cat pictures, watch Tik Tok dance-offs, and shop for birkenstocks to embarrass your mates during your #hotvaxxedsummer holidays, but you could also use it to research companies, download analyst reports, understand the macroeconomic landscape, and learn about changes in laws and regulations which may impact the stock you may be interested in buying.

We retail investors think up clever investment ideas on the side. Institutional investors with droves of Wharton and Harvard business school analysts at their disposals do this as part of their day jobs. Even if we assume that all information is available in real-time equally to both retail investors and institutional investors, it’s fair to say the institutional investors probably know how to analyse the information better than retail investors do (myself included of course).

You’re (probably) not the only Einstein on the block

You may have received straight A’s in your financial valuations course in university but given the battalions of institutional investors with billions of dollars in their arsenals, you’re probably not the first person to think that investing in airlines in a time of border reopenings is a good idea. Or the first person to think that investing in vaccine makers during the discovery of a new variant will yield you fruit. If you’ve thought of it, you can bet that someone else has too. And if the institutional investors in particular have thought of it, it’s probably priced-in. They’ve probably already placed block trades well in-advance of your thought processes at lightning pace and already driven up demand for the stock you had in mind.

This doesn’t necessarily mean there’s no value to be earned. Institutional investors and (other) retail investors aren’t wizards. They’re human beings capable of making mistakes. There’s an entire school of thought around investing in value stocks (which we covered in Share Investing 101: The basics) which speaks to this very question. What if a stock is being undervalued by the top end of town? What if they’re wrong and have oversold something? What if they’re underestimating the earnings growth you insist will be delivered? That’s all fine. If you’re comfortable enough in your conclusions, there’s nothing stopping you from investing anyway and smugly telling your mate that it isn’t, in fact, in your opinion, “priced-in”. Do keep in mind of course that financial valuation isn’t a perfect science. It’s all based on predictions and forecasts and nothing is certain. As with all active investment strategies, you really need to do your DD.