If you control the narrative, you control the share price

In a recent Chairman's List episode, I asked John Rayment, CEO of Identitii (ASX:ID8), "what's the question that you wish people asked more often?"

"How can I help?" was John’s answer, "If you've worked in the industry that we are selling into and you understand the problem that exists, then it's very easy for you to understand our business and the value that we can create. However, that's a really small section of the population on the planet..."

John is a switched on man and knows that investors can do more than supply the capital. Warren Buffet famously advised investors to "invest in what you know". In Identitii’s case, a large percentage of their investors are probably personally impacted by the issues that Identitti solves.

In my experience, though, John’s perspective is rare and most see investing as a spectator sport. For most issuers and investors, investment is limited to a transactional relationship built around capital and returns.

There are more obvious benefits that an issuer can get from investors. For companies like Identitii, for example, investors can create sales opportunities. Another company in this community has a group of hardcore zealots who influence broader networks of approximately 1,000 retail investors.

But today’s article goes a step further. I have found a theory that has grown on me since the day I first heard it. It seems outlandish at first, but over time I have found that it conforms to the patterns of the stock market in ways that few theories can.

The theory is by Ben Hunt, a former hedge fund manager, and it claims that the stock market is not driven by fundamentals, but rather by narrative…

Investing is not a spectator sport

In gambling, the gambler does not influence the outcome of their bet. Whether I put $20 or $2,000,000 on the Bombers winning the flag next year, my bet has no impact on their season (they'll still cause me pain).

Yet many investors and issuers consider investing to be akin to gambling. Especially when it comes to retail investing, the assumption is that the influence of the investor on anything beyond the share price is zero.

What does drive a company’s success, then? Well, most people would argue for fundamentals, but Hunt’s theory argues otherwise. In his theory, it is the investors themselves who control the future of the company. If everybody sells, then the stock price plummets and the company will struggle to access equity capital. If everybody buys, then the company has access to more equity capital.

You're probably tired of the Gamestop saga, but it truly is the poster child of this theory. What happened to Gamestop was the equivalent of me putting enough money on the Bombers that they actually won the flag. The memes, the Reddit communities, and the private WhatsApp chats amongst retail investors changed the narrative from one from fundamentals to something else. Whilst many of us scoffed, others laughed their way to the bank because their narrative had trumped ours.

“Ben, this is crazy, did you have a big Friday night?”

I understand how this sounds - I was sceptical myself! And I’m not saying that the fundamentals don’t matter. They do. According to Hunt's theory, though, just not in the way you think.

The critical distinction here is that fundamentals only matter if investors believe they do. There are other alternative narratives that some investors believe in more than fundamentals, and these narratives are ignored at the issuer's peril.

For retail investors, alternative narratives come from social media, friends and colleagues, and broadcast media. The narrative could be as strong as "sticking it to Wall St" or a strong belief about what the future holds. The influence of these narratives is also measurable, with reports showing that share price correlates to a stock's popularity on retail trading apps.

In conversations with investors last year, some Fresh Equities users acknowledged that the influence of technical analysis had become a factor in their investment decisions. In one memorable exchange, an investor started using TA despite not believing in it just because it was so successful. As the business parable goes, "you can be right, or you can make money."

My point is that whilst fundamentals are vital to sound investment decisions, they’re not always the narrative that drives a share price. This is a critical point because, if you accept it, your shareholder base is both more powerful and influential than you realise.

Taking control of the narrative with community-building

In our research for InvestorHub, a common insight given to us by company executives was that the decisions of retail investors were unpredictable and, therefore, uncontrollable. However, we have seen that a good narrative can influence the retail investor's decision-making process. So what can you do about it?

The most common factor amongst the successful small cap stories of the past 24 months is the existence of an investor community. Companies like Race Oncology have demonstrated a solid commitment to building and nurturing their investor community and, as a result, have been able to reap the rewards of their effort.

Building an investor community allows you to (a) build a shareholder base around a narrative that you control, and (b) have direct access to that investor base for communications and shareholder offers. So how do you build an investor community?

1. Identify and participate
   Your investor community already exists in its nascent form. They're likely people with a high degree of proximity to the problem you solve or the opportunity you're pursuing. Whether you're in mining, biotech, or cybersecurity, there is a community of people who already exist. The best starting place is Reddit, but you can find success with Hotcopper and Facebook as a starting point.
   
2. Contribute with sincerity
3. People who purely take from a community are easily identified and quickly excluded. The most-valuable community members give more than they take, and the best community members apply their expertise to make their contributions high-impact.
   
4. Be responsive
5. The quickest way to disengage from members of your community is to not respond. As time-poor as I know you are, you need to commit resources to remaining accessible to your community.
   
6. Be informative
   You have insight and perspective that your community will benefit from (for example, did you know that 44% of investors sell within three months of a placement?). Delivering it in an informative manner both creates value and promotes your company.
   
7. Remain compliant
   Community building is a relatively new approach to investor relations, but it isn't exempt from regulation. Remember, ASIC has eyes everywhere!

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