For a little over a month now the rekindled craze of Pokemon has swept the globe. This has translated to a temporary hysteria in the investment world, as well. Nintendo, the originator of the fabled Pokemon saw their stock price accelerate at a pace similar to the general public’s interest of the game. What has occurred since mid-July is a leveling of interest and expectations for both players and investors.
What we saw with Nintendo’s stock price is a classic example of what I dedicated a book to a few years ago. In Event Driven Investing, I put forth an investment philosophy and strategy built around visible news/events. In explaining the strategy, I noted that in situations, such as the Pokemon craze, you do not need to be the first one to the party. The most important part is that you realize relatively soon that their is party going on, which means investor excitement will become increasingly exacerbated.
When mass hysteria hits, it’s not difficult for ridiculous increases in price to occur over a short period of time. Nintendo’s stock doubling as a result of the exposure they were receiving from the new found popularity of Pokemon is not shocking. No one wants to get left out of the next big thing. In the mind of the market popularity = profitability. What is popular is assumed to be profitable. This is generally true, but the degree at which it is true can vary. In instances when unsuspecting trends emerge, such as Pokemon, properly gauging the correlation of popularity and profitability can take time. Therefore, the urge to react will outpace the data justifying the reaction.
In the chart below I am illustrating what is explained further in Event Driven Investing. The first stage is where we see the stock pop is the stage in which initial public interest is established. This period is when the news begins to decimate. The period is characterized by the stock price jumping significantly (+50% off the previous week’s levels in this case), but not to the level in which we would characterize it by full on madness. Remember, during the initial exposure to this Pokemon craze, we were hearing that Pokemon had more active users per day than Twitter and everyone from the company janitor to CEO were talking about it.
After this first wave, we see another wave of investors coming to the party. This is where your second wave of investors shows up because they too know the news and also see what has happened with the stock price. They do not want to miss the bandwagon.
The point of exit, which is always difficult to know precisely, shows itself on July 18th. On that day we see that the stock keeps trying to break above $38. It cannot, even thought it happens throughout the beginning and end of the trading day. Knowing that this is a craze, you might have been able to interpret the market’s activity as a sign to at least sell some of your position. The next day, on the 19th, is really the warning signal shows itself. You know that when Nintendo began it’s breakout it was at $18 per share. It had reached $38 per share, which is about a 111% increase in value. It now has pulled back from $38 and trades during the day from around $36 to $34. Volume is heavy during the day too. This signals that a good amount of holders of the stock are taking profit. This should be another warning sign that the rally might be over and it would be smart to take some more off the table. The next trading day the same pattern happens; the stock opens lower and can’t find it’s way back above where it started. Another bad sign. Time to get out of the position in full.
When the market is gripped by a mania, the craze can last a few days, a few weeks or even a few months given the circumstances. As an investor, you must stay on top of the position and be ready to get out. A difference exists between short-term investing and long-term investing. Event driven investing is about capitalizing on short-term movements in the market. The key is not to get overly greedy. Learn from the Pokemon crazy and the Nintendo stock’s reaction.