Presidential Candidates and Momentum Stocks

The media focuses as much on which Presidential candidates are able to attract funding as they do on the issues of the campaigns. There’s a good reason for this – the candidates that can raise money are the ones who can stick around and have a shot at actually running in the general election.

Scott Walker dropped out of the race only a few months after being the front-runner in Iowa and having raised over $20 million, which is pretty good in a field of 17 with Trump sucking up all the airtime. And then within a span of only a couple of weeks, he was dropping out. Why? Funds were drying up faster than the campaign’s costs could be cut.

Scott Walker the candidate hadn’t changed very much in the last two weeks. Scott Walker the campaign had changed. Word got out that fundraising was slowing, which kept other donors away. Financial supporters began to suspect that their peers were going to stop donating, so they themselves stopped donating. No one wants to keep throwing money at a losing horse, and they especially don’t want to be the only ones doing the money-throwing.

It’s a spiral that feeds on itself. Perception becomes reality.

One day, Walker is ascendant and everyone wants in. A few days later, no one wants in, which means that Walker is on the way down.

Momentum stocks work in a similar way. They go up because they are already going up. Investors, like campaign donors, enjoy the social benefits and psychological fuzzies of being on the winning team. The more they see other people investing in a name, the more they too want to invest. This goes on until the stock is no longer trading based on its fundamentals, but based on the greater fool theory, even if only subconsciously. Other people are going to want to buy this at even higher prices tomorrow. Everyone likes to throw money at a winning horse.

But then the buyers stop buying as much. New buyers don’t arrive and some of the old buyers begin taking profits. Then all of a sudden, the stock is no longer gaining. It is falling.

The company itself hadn’t changed very much in the last two weeks. The stock, however, had changed. It was a winner and now its a loser. The attitudes of its shareholders begin to change as well, especially the last ones in. What am I doing here? I don’t even know what this company does or why I bought it to begin with!

It’s a spiral that feeds on itself. Perception becomes reality.

One day, the stock is ascendant and everyone wants in. A few days later, no one wants in, which means the stock is on the way down.

The fundamentals of Scott Walker – midwestern state governor with a notoriety for fighting unions and bloated state budgets – hadn’t changed at all. But the state of his candidacy – or his publicly traded stock, if you will – changed overnight.

It should come as no surprise that there is a parallel between how political donors behave and how investors behave. They’re the same exact people, just operating in two different arenas.