It seems almost self-evident that whoever has the best access to current news sources gains a significant advantage as an investor. Because information is power. Or is it? The business model of the news cycle is increasingly reliant on triggering your emotional reflexes. How does today’s news help or hinder investors?
Thanks to Bloomberg, CNBC, Reuters, and other financial media, investors have access to an endless stream of stories about bubbles, high valuations, low valuations, what stocks Icahn is looking at, the market being up, or down, sentiments on bull markets, bear markets, or emerging markets, and whatever new cryptocurrency launched today.
Unfortunately, there’s no evidence that consuming all that information leads to better investment decisions, despite this delicious article from The Onion: Everyone Who Started Watching ‘Mad Money’ In 2005 Now Billionaires. There are several big problems with the news that make it unreliable as a basis for investment decisions:
1. It’s old.
No matter how early you get up in the morning, you cannot systematically receive news before other interested investors. Just try to get a trade in ahead of institutional supercomputers when the new jobless claims numbers come out. By the time the number travels from your retina to your grey matter, the news is already old and reflected in security prices.
2. It’s over-spiced.
News only sells if it’s dramatic. Pundits and commentators scream that the Dow is undervalued (buy now!) or overvalued (sell now!). Or even that we’re in a Dow-Pocolypse! Editors and producers know that only the juiciest headlines can grab attention in the fully saturated news market. In fact, Bloomberg reporters are paid bonuses when their headlines move markets. Think about that one for a minute.
3. It’s misused.
The brokerage business runs on news. Brokers at big box brokerage firms make their commissions by selling retail investors on trade “ideas.” They also employ consultants and advisors who make the same kind of pitches to institutional investors. These ideas are nothing more than storylines based on current news (financials have to rise in this kind of interest rate environment). More news means more ideas, which means more ways to drum up order flow. The 24-hour financial news cycle is a broker’s best friend.
4. It’s not predictive.
As much as we may wish to believe that the news tells us what will happen to securities prices in the future, acting on that belief can be costly. No one knows what will happen in the future. Markets are driven by earnings reports, interest rates, political rhetoric, consumer sentiment, war, terrorism, technology, hunch, rumor, fear, greed and any other variable that causes any investor anywhere in the world to buy or sell. No news story can capture all of these elements at once.
5. It’s emotional.
Perhaps worst of all, news is packaged to trigger emotional responses. A soaring headline about a great GDP number excites investors. A gloom and doom story about China scares them. We know that emotional investors make poor decisions – buying high and selling low, picking hot stocks that turn cold, and basing long-term decisions on short-term information.
6. It’s unhealthy.
Oh, by the way, if you need more reasons to ignore the news, this report shows that hospital admissions go up when stock prices go down. The closer you watch the market, the more likely you’ll be affected by daily market swings that are unimportant in the long run.
News can be informative and entertaining. It may help you in other areas of your life, but in investing, we strongly suggest you just say no. Instead, construct a portfolio based on the tried and true practices of people who have been doing it successfully for a very long time using their same variables, prices, earnings, valuations, risk and return profiles and behavioral strategies. Let the compounding do the heavy lifting for you.