Pokémon Go Proves the Stock Market is Inefficient and Irrational

I’m sure everyone reading this has witnessed the group of people walking around town staring at their phones and herding together in certain areas to play this new crazy Pokémon game.  I have never tried it (nor do I intend to), but I became curious about Nintendo stock when I saw the big stock gains announced on CNBC.  I quickly realized I was looking at a huge stock market inefficiency that played on the irrational thoughts of investors that Nintendo as a company was suddenly worth $7.5 billion dollars more than it was two days before.  You read that right…  On Monday, July 11, 2016, Nintendo’s stock appreciated so much over two trading days, that the corporation was now worth $7.5 BILLION DOLLARS MORE!?!?

After some quick research into the matter, I read that Nintendo only had a small stake in the app and that the games ownership had been clear since it was announced last year.   They actually only owned 32% of the Pokémon Company and that the revenue from the game was already in their current forecasts.  Not only that, but the Pokémon game was a collaboration effort with money being shared to other companies, such as Niantic Labs.

However, even with all this public information easily available by simply doing a few Google searches, Nintendo stock took off like a rocket.  It rose based on speculation and willful ignorance of the facts.  This event is something that should never have happened if what I learned in college was true.  When I studied finance in college, my professor’s taught me the “Efficient Market Hypothesis”, which basically states the price of a stock fully reflects all current and available information.  You can read the full definition on Wikipedia.  So trying to ‘beat the market’ is a fools game because a stock will always be correctly priced and never over or under valued.  This is the theory that investment firms who simply do indexing strategies love to quote.   One of the largest indexing firms, Dimensional Fund Advisors, has on their website this quote, “Markets reflect the vast, complex network of information, expectations, and human behavior. These forces drive prices to fair value.”

I find it fascinating that people still say things like that when Nintendo is just a recent example of how crazy the financial markets can be.  In my opinion, forces can drive asset prices to extreme levels of over and under valuation due to inefficient pricing and irrational behavior.  I remember back in 1999 when Toys.com as a company was worth more than Toys R’ Us even though Toys R’ Us made more profits in a quarter than Toys.com made all year.  There are countless examples like this that I have seen in my 18 year career as a financial advisor.  That is why I fully believe in active management because I have seen, and continue to see, wild market inefficiency.  I’m guessing there were at least a few people who saw the rise of Nintendo stock and bought some for themselves thinking, “Oh wow!  Look at how much it has gone up!  I’m gonna buy before it goes up more!”   Maybe they bought at $37.00 a share and guess what?   It closed at $26.24 on July 27, 2016.  Who knows where Nintendo stock goes from here and I don’t really care.  I just find it incredibly fascinating and a great example of how “Efficient Market Hypothesis” is a load of bunk in my mind.

So if you ever hear a financial advisor say to you, “the market is efficient and rationale…” just run.  Run away as fast as you can and hopefully give me a call!