Chapter 16: News You Can Use
“I heard it in the news, so it must be so.”THAT, ALONG WITH “this time it’s different,” has to be one of the more expensive phrases in the English language. In the 28 (plus) years (and going) I’ve written the “Portfolio Strategy” column for Forbes, I’ve often written about the challenges (and opportunities) in interpreting media. In my March 13, 1995, Forbes column, “Advanced Fad Avoidance,” one of the tips I included to avoid falling prey to harmful fads was:
If you read or hear about some investment idea or significant event more than once in the media, it won’t work. By the time several commentators have thought and written about it, even new news is too old.Some will read that and the other things I’ve written on media and wrongly think I mean news is bad and should be ignored. No! News is your friend as an investor! Don’t ignore it. Rather, learn to interpret it differently and more correctly, which overall and on average can give you an investing edge.
Look the Other WayFirst, reading news tells you what everyone is focused on. A valuable service performed for you for free! Most people know to make a successful market bet, they should know something most other folks don’t. But they don’t know where to begin to know what others don’t! An easy way to start is simply knowing what everyone else is focusing on—and looking away. You can use the news for that. The stock market is an efficient discounter of all widely known information. If you can easily find something online, in print, on TV, anywhere in our 24/7 news cycle—where information flies around the world with the click of a button—that news is likely already largely reflected in current stock prices. Or it will be soon and so fast, your chance to trade on it has likely passed. And the longer something appears as a headline story, the more its power to move markets has been sapped. That doesn’t mean if bad news comes out, stocks can’t drop. They might! News can impact sentiment, and sentiment moves fast. Trying to time short-term swings can be perilous. You likely end up whipsawed more often than not. And initial sentiment reactions to bad news are often hugely overdone. If you sell on the bad news, you may end up selling low and missing a better time to get out later—if the bad news is indeed so very bad. Plus, there’s nothing guaranteeing what you buy to replace the stock you sold only rises. Selling on bad news and bad news alone can mean buying high, selling low and potentially missing out on a rebound. Then, too, whether stocks are falling or rising, often it’s some other factor (or, likely, group of factors) than what’s widely discussed in media making that move happen. Which means if everyone is focused on something, you know you can safely ignore that and look the other way. At what folks aren’t focusing on. At those things that actually may have material future market-moving power. They’re looking in the rearview mirror, thinking it can tell them what’s ahead. That never works and sometimes leads to disaster. Look away. If you can do that, you can have an edge over other investors. Heck—over most professionals! But if you’re looking at the same news everyone else is and interpreting it the same way, you likely miss what those other factors are. You’re moving with the herd.
A Sentiment IndicatorNews is also a good sentiment indicator. Sentiment is key because over the next 12 to 24 months or so, it’s effectively interchangeable with demand. (Revisit Chapter 9 for more on demand.) If you understand where sentiment currently is and can develop a good hypothesis for whether it will rise or fall, you can know pretty well if stocks are likelier to rise or fall. You will hate my saying this, but measuring sentiment is often as much (or more) art as science. Lots of folks use consumer confidence indexes—the University of Michigan and Conference Board publish two popular ones—to measure sentiment. Except every sentiment index I’ve seen is flawed. They’re built, usually, to give you a decent snapshot of how people felt on average … last month. To be more exact, the indexes are an averaging of how people felt in the middle of the previous month. They’re coincident at best, but more backward looking. If stocks are forward looking (they are), knowing how people felt on average in the middle of the past month does exactly zero for you. There’s no evidence any confidence surveys are reliably predictive. But if you scan three or four national or global newspapers daily, you can get a good feel for general mindset. Media, consumed correctly, can give you, quickly and easily, a broad-strokes feel for sentiment. What you’re really looking for are sentiment extremes. Extreme euphoria is typically a bad sign—you see it at nearly every bull market top. Similarly, extreme negativity is characteristic of the bottoming period of a bear market. In-between sentiment is quite normal, and sentiment can swing fairly broadly within a bull market over short periods.
Interpret It to Use ItYes, news can be a good source of information—if you know how to interpret it and use it. For that, you must understand what the media industry is and is not. Most media outfits are for-profit businesses. They don’t deliver your paper each day (for those remaining that still do a print edition) in a white car with a red cross on the side. They aren’t in it for the sake of humanity—they want to turn a profit. In fact, they must turn a profit, or they cease to be. And there’s nothing wrong with that! Chasing profits is right and noble. It’s what allows firms to add shareholder value, hire, pay salaries, provide benefits, etc. All things people like. To remain afloat, many major media organizations sell subscriptions, and some very few are even successfully selling online subscriptions. But their bread and butter is now, always has been and always will be selling advertising. To garner higher advertising revenues, they must get eyeballs. The more eyeballs they can deliver, the more their advertisers are willing to pay them for real estate—whether online or in print. You’ve heard the saying, “If it bleeds, it leads.” It’s true! Because news programmers know, if they lead the evening news with a heart-warming story of a Girl Scout who won a $1,000 scholarship for her civics essay, no one will watch. They know they must lead with fire, mayhem, riots, robbery, murder, intrigue. This isn’t by accident. This is because, as discussed in Chapter 1, human beings evolved to be hypersensitive to danger (to better avoid attack by beasts, starvation, freezing to death, etc.) Which means, because of ingrained evolutionary responses, investors will often take action to avoid the possibility of near-term loss—even if it means harming themselves more in the long run and robbing themselves of superior returns (once again, that concept of myopic loss aversion). Which is why bad news sells. Just a fact. You know that instinctively. When news outfits cover negative news, that’s a business decision, pure and simple, to gain eyeballs. There’s nothing wrong with that! If you like reading a newspaper, you want it to be profitable. And being profitable means the media will often lead with what humanity naturally will be most interested in. Said differently: Highlighting positives can sap profits. So if you think, “All I hear or read is bad news!” that’s probably true! But it’s not necessarily because all is bad in the world. Rather, that’s just media firms trying to maximize profits.
Ground Rules for Interpreting Media ProfitablyKnowing how the media operates and why, how can you be a better news consumer and actually glean something useful? By following a few ground rules.
- Media reports news—by definition, this is what has already happened. But stocks are forward looking! If the media is reporting something, the time to react and trade on that particular news item has likely passed.
- Stocks reflect all widely known information. That doesn’t mean, in the near term, the stock market is always correct. It isn’t! Because people aren’t always correct. Rather, the stock market reflects widely held views.
- As such, forecasting market direction is about measuring relative expectations. When forecasting stocks over the next 12 to 24 months, reality can matter less than what is expected to happen. Understand what most people expect and craft reasonable probabilities around what you think is likely to happen. It’s that gap between reality and expectations that will drive stocks.
- Don’t be a contrarian. It can be tempting but won’t help you any more than following the crowd. Just because the media says something is so, it doesn’t mean the opposite is true. It just might mean the expected impact is under- or overstated. Just because they say something is so doesn’t mean it is. Make that a mantra.
- Always put data in proper context and ignore the author’s point of view. Journalists know giving the straight who/what/where/when/why/how may not always get eyeballs. They may include an exciting narrative that increases entertainment factor, but might obscure reality. Or they may use anecdotes, which are compelling but may not be statistically significant. That’s fine! Most people won’t read the paper if it’s a snooze-fest. But that can be less useful if you are trying to measure likely market impact. Mentally put a line through adjectives and adverbs, ignore anecdotes unless they highlight something fundamental and isolate the facts. Then consider them in context. Scale the number. Ask, “What’s the global impact?”
- Be politically agnostic. Many people have an ideology they view as correct. And that’s ok! But ideology is another form of bias that can blind you. A subset of this is you should avoid thinking, “Well, I typically agree with this set of people, which means they’re always infallibly right.” Vary what you read, and be an equal-opportunity skeptic.
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