Back in March 2014, shares in Monitise hit a high that valued the financial technology company at more than £1.3 billion. Yet, thirty months later it was worth just £57 million. Ninety-five percent of the valuation had evaporated. Monitise joined the Alternative Investment Market nine years ago, with high hopes of leading massive technological change in the banking sector. These days, some might argue that it’s priced to go bust.
For loyal shareholders, there are faint signs that Monitise can turn some sort of corner. But looking back, it looks increasingly like a classic ‘story stock’ disaster. Story stocks have it in them to attract large armies of loyal investors, but they can end in disappointment. So let’s explore why that is, and the typical profile of story stocks - and the risks they pose.
Why humans love a story
In psychology and behavioural finance, stories in the stock market are well known as a source of investment peril. A big part of the problem is that humans are naturally attracted to interesting stories. And it seems we’re often prepared to skimp on conventional investment research in order to own them.
James Montier, a well known investment analyst and behavioural scientist, has written that of all the dangers that investors face, perhaps none is more seductive than the siren song of stories. He says that stories essentially govern the way we think and that we will abandon evidence in favour of a good story.
His views are echoed by Daniel Kahneman, an influential researcher into human behaviour. In his book Thinking Fast and Slow, Kahneman writes that stories of how businesses rise and fall appeal to readers because they offer a simple message of triumph and failure (whilst ignoring the influence of luck and regression).
He says: “These stories induce and maintain an illusion of understanding, imparting lessons of little enduring value to readers who are all too eager to believe them.”
In other words, Kahneman believes that a good story gives the reader a false sense of confidence that they really understand what’s in front of them.
The profile of a story stock
It’s worth saying that not all story stocks are going to be bad investments. It’s inevitable that at least some very popular blue-sky shares will come good.…
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