At The Money: How to Use Narrative Information

Do fundamentals or narratives drive market valuations? That is the question so many are wrestling with in today’s 24/7 algo-based platforms and AI-driven mediascape. Ben Hunt is founder of Perscient, a firm that studies how narratives and stories shape markets, investing, and social behavior through the lens of information theory, game theory, and unstructured data analysis. His work analyzes the language, story arcs, and viral spread of explanations in media Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 2:36Barry Ritholtz?

  Investors have long been taught that fundamentals drive stock prices. Revenue, growth, profits, as Benjamin Graham taught us, in the short run, the market is a voting machine, but in the long run, it's a weighing machine. But what if it isn't? What if narratives are driving market valuations? I'm Barry Ritholtz, and on today's edition of At the Money, we're going to discuss how to identify when market narratives overtake fundamentals. To help us unpack all of this and what it means for your portfolio, let's bring in Ben Hunt of Persiant.

• 3:17Barry Ritholtz?

  Ben's firm studies narratives and the stories that shape markets, investing, and social behavior through the lens of information theory. So Ben, let's start with a definition. How do you define a narrative in the context of markets and investing?

• 3:35Speaker 05

  It's a simple definition. A narrative is an answer to the question, why? Why did the market go up today? Why should you buy this stock? Why should you sell this stock? Why should you vote for this person? Any answer to the question, why, is a narrative.

• 3:54Barry Ritholtz?

  Well, how do you distinguish between something like data, which arguably comes with a storyline attached to it, and just a straight up, hey, Bitcoin is millennium or digital gold? Like, how do you define the difference between this, I guess, this stock is cheap with a P E of nine is a narrative?

• 4:17Speaker 05

  Yeah, well, why is, why is a P E of nine cheap? Right? Or why is a P E of three cheap? Or 15 cheap? These are all stories. Barry, any valuation, any multiple, any meaning that you attach to numbers, it's a story. It's an answer to the question, why? Why do I call it cheap? Why do I think you should buy it? Why is this interesting? Those are all why questions, and the answer, those are all narratives.

• 4:49Barry Ritholtz?

  So, how do you identify any particular narrative that may be driving a particular stock or asset class, or the overall market? What tools do you use to help discern that?

• 5:05Speaker 05

  Well, let me start by saying what I don't care about. So what I don't care about is truth or accuracy. I mean, it sounds crazy, but I-

• 5:14Barry Ritholtz?

  Not at all, because you're trying to figure out what the crowd believes, whether it's true or not.

• 5:19Speaker 05

  Well-

• 5:19Barry Ritholtz?

  If it affects their behavior, it matters.

• 5:22Speaker 05

  It matters, right? So I've given up on trying to figure out what reality is. What I'm trying to figure out is how is reality being presented? How is it being presented to us? So what I'm looking for are elements of presentation. I'm looking for word choice. I'm looking for how loud is it being presented to you? How frequently is it being presented to you? But most of all, Barry, I'm looking for a concept that you talk about in network math, and it's called density. And I'm looking for how the language is connected to other words.

• 6:04Speaker 05

  In fact, those are the measurements you use in network math. Those are where we talk about between-ness. We talk about connectedness and centrality. Those are the measurements, because I'm looking at the presentation, not at the reality.

• 6:21Barry Ritholtz?

  So, how do you measure density? You hinted at some of it, how loud it is, how repetitive it is. How do you tell when a specific narrative is beginning to exert influence over prices?

• 6:35Speaker 05

  Yeah, so Bob Shiller wrote a pretty good book a couple of years back called Narrative Economics. And the takeaway from that book is that you should think about and understand narratives in exactly the same way you think about and you understand disease. I mean, you use the same measurements. You remember when we were talking about COVID, it was R naught, right? How, how fast does it spread? How quickly does it spread? What is the medium in which it can spread most easily? It's exactly the same thing here, Barry. It's exactly the same thing.

• 7:16Speaker 05

  You're, we're really using exactly the same math as you would use to try to understand epidemiology and the spread of a virus. So what we're looking at, though, instead of the atmosphere or wastewater, we're looking at the words. We're looking at all the words that are out there in terms of text of what's being written, what's being said. This is all unstructured data, and we're looking for the presence of certain ideas, clusters of words that spread through that medium of media in exactly the same way that a virus spreads through the air or through the water.

• 7:59Speaker 05

  If you're a financial advisor or you're a market person of any sort, and somebody comes up and says, yeah, why the, why the market go up today? And you could say, well, there are 100 different reasons, but basically it was just variance. You know, it's just, it's just, it's just

• 8:19Barry Ritholtz?

  Random walk.

• 8:20Speaker 05

  It's just a random walk why it went up today. So someone

• 8:24Barry Ritholtz?

  People hate that answer, by the

• 8:25Speaker 05

  People hate that answer because it's a crappy story.

• 8:27Barry Ritholtz?

  Right.

• 8:28Speaker 05

  It's a, it's a

• 8:28Barry Ritholtz?

  It may be true, but it's not compelling.

• 8:31Speaker 05

  Exactly. It's not truthy, right? It doesn't, it doesn't connect with you. It's like, well, that's disappointing. I want a story. So. The stories that are basically there to fill the time. And these are, these are typically examples where I call them descriptive narratives. They're, they're answering the question, why, but they're describing why something happened.

• 9:02Barry Ritholtz?

  Always after the fact, never in advance.

• 9:04Speaker 05

  Always after the fact. That's exactly right, Barry. So what you'll find is that, I don't know, it's earnings season and who comes out first with earnings, financials, right? And so, you know, Citi and Goldman Sachs, whoever, they'll report some good earnings, the stocks will go up. And afterwards Kramer and everyone else has got to tell you why. And they'll say, oh, I'm bullish on financials and they'll give you a reason. And that, the half-life for that sort of narrative, it's a week or two. Right? I mean, it's, and, and what you want to do with that, honestly, Barry, is you want to fade it.

• 9:48Barry Ritholtz?

  Right.

• 9:49Speaker 05

  You, you, you want to look for that to appear in your Bloomberg email in the morning saying, oh, market experts bullish on financials because blah, blah, blah. And when that drum beating gets pretty loud, when it's appearing in your morning email, I want to fade it. You don't want to press it, you want to fade it because this is, this is just the, the ordinary business of Wall Street. You've got to have an answer to why. It's almost usually just variance or some combination of idiosyncratic stuff. But you've got to come up with some blanket why. And if that gets a lot of play, I want to go the other way. Now, there's a, there's another type of narrative though, where

• 10:33Speaker 05

  I want to press it. And so that's what we call prescriptive narratives. It's not saying, oh, the Fed is dovish. It's saying, you know, Mohammed El-Arian will come out or, uh, I don't know, Trump will come out and say, the Fed should be dovish. You see the difference? It's not, it's not describing what's already happened. It's trying to lay the framework for what should happen.

• 11:03Barry Ritholtz?

  So, so let's delve into that. What sort of tools are you using to identify these narratives? Be they descriptive or prescriptive?

• 11:14Speaker 05

  Yeah.

• 11:14Barry Ritholtz?

  How, how much lead time do you get to analyze? You know, this giant corpus of noise and commentary and data that is produced every single day?

• 11:27Speaker 05

  Well, this is what good traders, honestly, and, and investors have always done. Uh, they've, they've, they've always made these sort of, um, assessments of the news and the stories that are happening. So this, what we're trying to do is we're trying to externalize what good traders, and I'll call it short-term investors, have always done. They've always internalized this. So anybody can do this. You start looking for the words that are trying to prescribe versus describe. Uh, that'll, you, you can, you can pick this up in whatever you do.

• 12:08Speaker 05

  What we're able to do though today is because there's now big data, is because there's big compute, is we can read everything. I mean, humans, we're all limited in what we can read, what we can pay attention to in our little corner of the world. What's possible today is to read everything and to analyze exactly this sort of word choice.

• 12:31Barry Ritholtz?

  So what sort of output do you get from your big compute that's scraping everything?

• 12:38Speaker 05

  Yeah.

• 12:38Barry Ritholtz?

  Sifting through all the language, like, does it identify specific words? Does it identify themes? I'm assuming artificial intelligence and big data analytics is a key part of this. What does the output look like to you?

• 12:54Speaker 05

  Well, let me start with where it starts, because it's not that the output comes from what you put into it. And what you want to put into it, and this has to be human generated, are, well, what are the ideas? What are the narratives that I care about? Here's why that's important, Barry, because let's say you're a value investor. You've got a vision, you know, you've got a view on a stock. And like all value investors, you think the market has not recognized the story about this stock that I think is really important. So what you're looking for is not

• 13:35Speaker 05

  how loud is that story right now? That story is dormant. You're looking for that story to start being told. So you can't start this from asking AI, hey, AI, what are the prominent stories right now? Because it can only tell you what's being spread right then and there. What I find the way to really make money with narratives is to say, what narrative is dormant today? I want to see when it starts to get discovered. Is that discovery phase when the market, quote unquote, wakes up to a story that you've been looking for the market to wake up to?

• 14:19Speaker 05

  That's how I find you can most reliably make money from narrative investing.

• 14:28Barry Ritholtz?

  So I get the sense we're still in the early days of narrative investing as as a key strategy, at least in terms of using AI and and big data. What do you see developing in this space? What's the narrative about narrative investing?

• 14:49Speaker 05

  Barry, this is, like I say, this is an old idea. So if you, if you go back and kind of look at your Wall Street history, or if you talk to kind of traders today, what they're always looking at is the news that comes along. And they're trying to say, hey, do I fade that? You know, is that story worn out? Is it, is, is, is it topping over? Or does this story have legs? Is this the start of its spread? Like a virus? So it's an old idea. What's possible today is to quantify it. What's possible today is to externalize what good traders have internalized in the past. So it's, it's not that it's,

• 15:35Speaker 05

  you know, inventing cold fusion or really doing anything that's new in the world. What it is able to do though, is to make that sort of analysis, to look at not what reality is, but how reality is being presented. And make it available over a much wider scope. Not over just that little area that the good trader really knows a lot about. And make it available over a lot more publications and things that are being written. Because humans can't read everything. Really, I think it's a, it's a way of, I hate to call it democratizing investing. I really hate that idea. But it really is a notion of creating a new instrument.

• 16:18Speaker 05

  So every investor can understand,

• 16:23Speaker 05

  well, what are the stories that are being told about the world today?

• 16:27Barry Ritholtz?

  So to wrap up, technology has enabled us to read much more than we were capable of reading as individuals. In fact, the machines can read everything. And we can use those machines to identify dormant narratives that might lead to increases in either a particular stock or asset class or market. A fair, fair statement?

• 16:54Speaker 05

  Very fair. What you're looking for is what's new, what's changed. Because when the narrative changes, that changes behavior.

• 17:04Barry Ritholtz?

  Fascinating stuff. I'm Barry Ritholtz. This is Bloomberg's At the Money.

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