We live in an age of reaction.
For every new piece of information that comes out, the response is instantaneous.
That’s especially true for the stock market, where there is no shortage of major news, business developments, or statistics demanding immediate attention.
Technology only helps get the word out faster than ever before.
Today, it takes minutes to record a reaction video on TikTok.
Within the hour, the internet will be flooded with breaking news, and social media will be set alight with this new bit of information.
The operative word here, of course, is speed.
The race to be first is not the only factor.
Every new piece of information or data point in the stock market is also dressed up to sound more important.
The use of click-bait titles, designed to elicit a reaction, often draws a response, causing investors to buy or sell stocks based on the latest news.
That’s not the end of it.
The hours and days that follow are often filled with interviews and discussions over what the new information means for investors, with every pundit eager to weigh in with their views.
The problem does not just lie in the reaction.
From the start, most of this information pushed out may not be as useful as you think.
The reaction news cycle
Recent events at Netflix (NASDAQ: NFLX) provide a useful example.
A year ago, the online streaming platform recorded a loss of more than a million subscribers in the first half of 2022.
Predictably, the media bandwagon were quick to jump on this unsavoury news, with some painting the situation as the worst crisis in its entire history.
As expected, what followed was a litany of opinions over why Netflix had lost ground.
Many pointed to an increasingly crowded field of competitors, such as Disney+, HBO Max and Paramount.
Others dug deeper, connecting Netflix’s subscriber losses to its lack of content quality, portraying the streaming giant as clueless while competitors steal market share from right under its nose.
From there, any move the company made was viewed through the lens of a struggling business.
For instance, when Netflix conducted layoffs to realign its cost structure, the spectre of its recent subscriber losses was highlighted and repeated as the main cause of its action.
Digesting the reaction news cycle
To be fair, some of these criticisms have merit.
For starters, the Los Gatos company admitted that competition is one of the possible reasons why its subscriber growth had stalled.
For the impatient investor, that sounds like terrible news.
Yet, here’s the thing.
Acknowledging the presence of competition is healthy.
Why?
Because the alternative is far worse.
A company that denies the existence of potential threats will suffer a lot more in the long run.
Case in point: when Netflix announced its entry into Singapore back in 2015, local PayTV provider StarHub (SGX: CC3) insisted that its own TV service will remain resilient despite the former’s entry.
Unfortunately, its bravado was ill-placed.
Even after losing 47,000 subscribers from its peak, the Singapore telco stood its ground, stressing that its high-value members will remain loyal.
To further emphasize its point, StarHub pointed out that its average revenue per user (ARPU) had remained stable despite the presence of competing services.
But alas, the company’s bluster here did not hold water either.
Today, StarHub’s ARPU has fallen by almost a third compared to its pre-Netflix entry peak.
Looking past the reaction cycle
When management describes the reasons why results have fallen short, many in the media will see its concession as a sign of weakness.
Yet, acknowledging existing competition is not the same as conceding defeat.
As such, investors should look past the admission and examine what the company will do next.
In the case of Netflix, co-founder Reed Hastings outlined plans to launch an ad-supported plan, breaking one of its long-held beliefs that streaming services should be ad-free. The company will also crack down on password sharing between households.
You may think that having a game plan would be enough to placate the financial media.
But oftentimes, the lack of details or backing data colludes to undo the company’s best intentions.
Worse, these moves can also be painted as desperate measures taken under duress.
Again, investors need to keep their thinking hats on when faced with a flood of reactionary opinions.
Developing a new strategy and bringing it to fruition takes time.
A single quarter is hardly enough time for any business to execute a new business initiative. In addition, to state the obvious, any data to back the success of its execution will take more than three months to be delivered.
All that was needed was for investors to be patient.
Where have all the reaction cowboys gone?
As it turns out, Netflix exceeded expectations and launched an ad-support plan within six months of its announcement.
Fears over subscriber losses have also been proven to be largely unfounded.
In the second half of 2022, the company added over 10 million subscribers, over 10 times the amount of subscribers it lost in the first half of 2022.
Meanwhile, Netflix’s content remains as popular as ever.
Hit series such as Wednesday accumulated over a billion views, joining the ranks of Stranger Things and The Squid Game as some of the most watched series on its platform.
The online streaming provider added that 60 percent of its content self-produced.
Such data puts complaints over content quality to rest.
To top it off, Netflix delivered US$5.6 billion in operating profit for 2022. This achievement stands in stark contrast to the industry’s combined operating losses of well over US$10 billion over the same period.
Needless to say, the naysayers have gone quiet. It’s not surprising, given the data no longer supports the reactionary narrative that has been portrayed.
Most, I presume, have deserted the stock for other reactionary news.
Amid the noise, shares of Netflix have rebounded, more than doubling from its 52-week low.
Get Smart: Break free of the reaction news cycle
Reactionary news relies on the illusion that you can enter or exit a stock before the information hits the mainstream.
While the above sounds reasonable, in reality, it is not the case.
Oftentimes, if a new development is significant, the stock price would have reacted before you can press buy or sell in your brokerage account.
If that’s the case, what is the common investor left with?
Patience, as they say, is a virtue.
In an age where reactions and opinions are a dime a dozen, you do want to slow down and consider whether every piece of news is worthy of your attention.
Time, after all, is your most scarce resource.
Giving it away cheaply to every reactionary news could prove to be expensive in the long run.
In my experience, actual news which causes permanent damage to a business is rare.
Instead, seek businesses that deliver results over years, not every three months.
As the case with Netflix has proven, your patience can be richly rewarded.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: Chin Hui Leong owns shares of Netflix.
