Lies…lies…lies…Mr Market, I swear they are!

He tried everything. He really did. Physics just didn’t have an all-encompassing framework that brought the universe together neatly in his mind.

His theories on relativity and quantum mechanics were revolutionary and proved incredibly accurate. But in the years that followed he became increasingly frustrated with their utter incompatibility.

It was a clear evening. He could see the snow glistening down below under the streetlamps. Huge mounds lay freshly shovelled. It was amazing to see how quickly snow accumulates. It was getting late and he needed to get home. Then it dawned on him.

He rummaged through the draws of his desk frantically and found a scrap of paper. He wrote on it, “Compound interest is the eighth wonder of the world. He who understands it, earns it, and he who doesn’t, pays it”.

This is actually one of the most famous quotes in modern finance on compound interest. There’s just one problem – Einstein never said it. It’s completely made up.

I’ve seen it in books, newspaper articles, journals, white papers, PowerPoint slides and even Google search results. Numerous people who are far more intelligent and experienced than me, cite this quote like it’s scripture.

It’s so embarrassing. I mean why in the world would Einstein even say this. I’m sorry, but out of all the mathematical curiosities our universe has to offer, compound interest isn’t the most wondrous. It’s a very simple concept that will make you a lot of money if you’re patient. But it’s not exactly π.

So where did this quote come from?

Well it’s the result of “Chinese whispers”. Einstein died in 1955, but it wasn’t until 1976 that his name got linked to compound interest. It started with an opinion column written in the Wall Street Journal:

“All I can do is remind them of the truth of Albert Einstein’s alleged response when he was asked, ‘What do you Mr. Einstein, consider to be Man’s greatest invention?’ He didn’t reply the wheel or the lever. He is reported to have said, ‘compound interest!'”

Since then, about five iterations of compound interest quotes linked to Einstein have evolved.

Fake news has been around for a long time. It’s been used in warfare to discredit enemies, to make money, to push political agendas and sometimes just to entertain.

There are so many great examples in the past, yet we have only recently started calling it fake news.

One of my favourites is that the Great Wall of China is the only man-made object that can be seen from low orbit with the naked eye. Some have even claimed that you can see it from the Moon, which is ridiculous.

The low orbit theory seems plausible at first. The International Space Station is orbiting 254 miles above the Earth. But unfortunately, even the Great Wall of China is too small to be seen clearly from this distance.

Now I know it sounds strange, but disinformation can be incredibly destructive. This is especially true when it’s absorbed by an emotionally driven stock market.

I think legendary investor Benjamin Graham, who wrote The Intelligent Investor, explains this amazingly well using his fictional character Mr Market.

Imagine you own a business alongside a partner called Mr Market. This partner is very temperamental. Unfortunately he’s a bit of a manic-depressive. There are times when he feels so depressed that he just wants out; he’s willing to sell all his shares to you for far below what they are fundamentally worth. Yet there are times when he is in such a good mood that he’ll generously offer to buy your shares for a lot more than they are actually worth.

Right now the market is really calm. Many see this as an example of excessive investor complacency, exacerbated by the purchase of financial assets by central banks. Others however, see this low volatility as a reflection of the stable macroeconomic climate that has largely persisted – with the exception of a few severe disruptions – since the ‘Great Moderation’ that started in the 1980s.

Regardless of what you believe, the market is always at risk of changing its mood. And, the pace of these mood swings is set to increase with the exponential growth of information being created. 

There are bloggers, journalists and professional investors writing about markets everyday. The problem is that not all of what is written is market friendly.

For instance, there was an article published in Seeking Alpha on 18 January 2012, on a cancer treatment made by ImmunoCellular Therapeutics. The company had paid an author to write it.

The article claimed that this treatment would cost less than a product made by a rival. In the months that followed, its share price rose strongly from $42.80 to an historic high of $155.20 by July 2012. Then it plummeted to a rock bottom $2.23 following a disappointing clinical update on the drug in December 2013. The incident was so pronounced that the U.S. Securities and Exchange Commission investigated it.

Unfortunately these incidents happen more often than not. History is littered with examples. The truth is that fake news has always been a problem in financial markets. It’s been a huge headache for regulators and this has become even more of an issue with the birth of the Internet.

Not all of it is intentional. For instance in 2013, $130 billion was wiped off the US stock market in minutes after the Associated Press tweeted about an explosion that injured Barack Obama. After they announced that their Twitter account had been hacked, the market quickly recovered. The blame for this instant overreaction was place on high-frequency trading algorithms.

I think the lesson here is not to get distracted as an investor. There is a difference between the price of a stock and it’s fundamental value. The price may move on a daily basis, but this doesn’t impact the fundamentals. The fundamentals will, however, be eventually priced in.

Warren Buffett once said “the stock market is a device for transferring money from the impatient to the patient”.

It’s true! Who cares how Mr Market feels. He’ll calm down eventually.