Naked positions, naked options and naked short selling are familiar terms for financial market participants, but the “Naked Emperor” is a new concept, albeit from an old story.
The story is The Emperor’s New Clothes, a fairy tale written by Hans Christian Andersen almost 200 years ago. And the concept relates to herd mentality, the passive/active investor dynamic, and the fresh eyes required to spot a “Naked Emperor”.
First let’s recap the tale – it’s of an emperor whose vanity and pride make him a target for conmen. One day a couple of these types arrived at the palace claiming they could weave special clothes that become invisible to anyone who is stupid or unfit for their job. Thinking this was a good way of telling wise men from fools, the emperor paid them handsomely to weave him some of these fine clothes.
Fearing he might indeed be stupid, the emperor sent his trusted advisors to see how his new robes were shaping up, and, not wanting to be exposed as frauds, each separately reported back how beautiful the cloth looked despite seeing empty looms. When the robes were finally “finished” (and the king’s coffers substantially lightened) the tricky tailors brought them to the emperor’s dressing room. Although the emperor couldn’t see a thing, he declared the robes magnificent in order to demonstrate his fitness for office. He turned this way and that as the tailors pretended to dress him and at last was ready for the royal parade.
The townspeople, not wanting to admit their stupidity, applauded as the emperor paraded through the streets. It was while the emperor was basking in this admiration that a child asked its mother loudly why the emperor had no clothes on. The spell was broken and the truth was revealed – the emperor was naked! Applause and admiration turned to laughter and ridicule and the reign of the emperor was over.
The concept of a Naked Emperor can be seen in equity markets – where a market darling has a dramatic fall from grace once a weakness or deficit is exposed. A Naked Emperor is obviously undesirable in a portfolio, but the ability to spot it and capitalise on it is the advantage held by active investors.
This advantage for active investors is amplified with the rise of the passive investor creating more potential for Naked Emperors to exist. To illustrate the case, imagine a new company comes to market and it’s in a hot sector. There’s probably a fair degree of blue sky built into analyst forecasts and with plenty of hype reflected in both the share price and turnover, the stock makes it into an index. Index inclusion brings passive investors into the mix and momentum sees the stock rise higher and darling status attained.
Now for spotting the Naked Emperor. Fundamental analysis, management meetings, competitor scrutiny and more recently, ESG integration have been the traditional tools of the trade for active investors. But there’s a new tool in the box – one that quantifies what the herd is thinking about a particular stock, and how an active investor’s view compares with that of the herd. MarketMeter is the new stock screening tool that gives active investors sentiment insights and benchmarking capabilities that hadn’t previously been available. Emperors with no clothes look out!
MarketMeter’s stock scoring portal is used by some of Australia’s largest super funds to assess their Australian equity managers’ views on a particular company’s management, strategy, financials, ESG credentials and shareholder engagement, as well as to review the relative scores of each ASX200 stock across all performance categories. The aggregated, anonymised stock sentiment data is available on MarketMeter’s analytics platform and is free to contributing institutional investors and brokers.
It takes just minutes for investors to score the stocks they cover on MarketMeter’s platform and then benchmark their stock views against those of their peers across 26 categories ranging from a stock’s climate risk management credentials to its investment desirability. Herd investor sentiment is now discoverable and interrogatable, providing opportunities for investors to uncover hidden gems and expose Naked Emperors.
Institutional investors and brokers can contribute their stock scores here until late November: https://stockscores.marketmeter.com.au/signup
MarketMeter’s purpose is to provide listed companies with aggregated, anonymised investment market views in order to highlight areas of risk and promote corporate best practice. MarketMeter shares anonymised data with the Australasian Investor Relations Association (AIRA) to determine its annual IR Best Practice Awards, as well as with APRA-regulated super funds for their internal valuation frameworks and The Behavioural Insights Team to explore ESG themes.
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