3. The trigger: which news actually revises an expectation

Level 4: What really moves the price

Hundreds of news items about listed companies come out every day. The vast majority change nothing about value, and a tiny minority change everything. This module is a filter: how to tell a trigger, meaning a piece of news capable of revising the expectation built into the price, from noise, meaning a piece of news capable of revising only the headline.

The three-question test

Faced with any piece of news, three questions in order settle 90% of cases:

• Does it affect one period or the whole path? What changes a single year is noise as far as value goes, however large the figure. What changes the slope changes every year that follows.
• Does it touch a dominant driver of this business? News about margins in a company whose valuation depends on capital is interesting, but secondary.
• Is it reversible? A deviation that corrects itself revises nothing. One that settles into the market does.

Notice that none of the three asks about the size of the headline. Size is the worst possible guide: the biggest moves in value tend to come from news you can read in two lines.

Real triggers

Four families, with the logic of why they bite:

• A sustained change in prices. If the company manages to raise prices 3% without losing volume, and the operating margin was 10%, that 3% drops almost entirely to the margin: it moves to around 13%, meaning operating profit rises by roughly 30%. And it does not happen once: it stays. It works just as well in reverse: a price war that cuts 3% takes away a third of the profit permanently.
• The arrival of a serious competitor. Not just any competitor: one with capital, distribution and motive. What gets revised is not next year, but the duration: how many more years the company will be able to keep earning returns above its cost of capital. That is the parameter that moves the most value and the one that appears least in headlines.
• A structural regulatory change. A change in the rules can cut the maximum legal margin, ban a business model or open the door to competitors. Here it is not a figure that gets revised: it is whether the business exists.
• The loss of a customer that was an enormous share of sales. If one customer accounts for 20% of revenue and walks away, you do not lose 20% of the profit: you lose a good deal more. With fixed costs that do not disappear, a business on a 10% margin that loses a fifth of its sales can end up at zero margin or below. And on top of that it reveals that the relationship was fragile, which lowers the quality of everything that is left.

Expensive noise

And now the news that fills front pages and almost never revises a well-built expectation:

• A quarter with adverse currency moves. If the business is the same and all that has moved is the exchange rate used to translate it, value in the home currency has not changed. Currencies swing both ways; a sensible expectation is not built on one quarter's exchange rate.
• An exceptional charge. A write-down, a severance payment, a one-off fine. It reduces one year's profit, almost never the future capacity to generate cash. The exception is when the charge is a confession of a recurring problem: a write-down that repeats three years running is no longer exceptional, it is the business.
• A change of chief executive with no change of strategy. The market usually reacts, and usually gets it wrong. Without an announced change in capital allocation, prices or markets, the path of cash flows is the same. It is a different matter when the new management arrives precisely in order to change the strategy: then the news is not the person, it is the plan.

The symmetrical error: confusing volume of coverage with relevance

There is a cruel asymmetry here. Genuine triggers tend to arrive in boring documents: a regulatory filing, a paragraph in an annual report about customer concentration, a discreet change in a rival's pricing policy. Noise arrives with video, red charts and interviews. If your analytical process feeds on whatever is most visible, you will be systematically reacting to the irrelevant and arriving late to what matters.

A useful exercise with every piece of news: try to translate it into a sentence with this exact shape. This changes such-and-such a driver in such-and-such a direction for so many years. If you cannot complete the sentence with numbers, even approximate ones, you are probably looking at noise.

Real cases: two textbook triggers

The first, a concentrated customer. In April 2017 the British company Imagination Technologies announced that Apple, the source of an enormous share of its licensing revenue, had notified it that it would stop using its graphics technology within a couple of years. Not a single figure for that quarter changed. The share sank by around two thirds in a single session. The market did not revise a year: it revised whether the company had an independent future.

The second, regulation. In July 2021 China announced rules banning profit-making in tutoring academies covering the compulsory school curriculum. The listed companies in the sector, which until that moment were growing strongly and had real, verifiable revenue, lost most of their value within days: falls on the order of 70% or more. No operating figure published that month explained any of it. What was revised was the terminal value, that is, the part of the valuation that assumed the business would carry on existing indefinitely.

Take the magnitudes, as always, as orders of magnitude. The lesson is exact: what moves the price is what moves the path, not what moves the front page.