How to read financial headlines.
I just read another wonderful piece of writing by Ben Carlson about how to read financial headlines. My write-up on this topic might have been a bit shorter and sweeter….DON’T. The financial media is a horrible place to get any long-term financial planning advice, because it is relentlessly biased to the negative and pervasive in its short-termism. If you can tune it out altogether then the chances of getting to where you want to go I believe are much higher. However, things pop up on social media and in the newspaper and it’s hard to ignore some articles because they are serving the purpose of making you want to panic (or never invest in the first place – a more common situation for women).
So here are my favourite headlines from Ben Carlson’s post along with my comments.
Headline: Stocks Rose/Fell Today by 1% Because of _______ How to read it: Millions of shares traded hands today because investors all have different goals, strategies, risk profiles, holding periods and ideas.
GL: They certainly do, and the only thing that matters is YOUR goals, strategy, risk profile, holding period and ideas. On a daily basis stocks go up a little more than half of the time and down a little less than half of the time. So you may as well toss a coin as to whether they will go up or down tomorrow. What they will do over a decade or two is far more certain.
Headline: [Popular economist/fund manager] Expects Market Volatility to Pick Up Later This Year How to read it:Saying you expect volatility to pick up at some point in the future is like saying you expect it to rain at some point in the future. And volatility works both ways — to the upside and the downside — so really this is just a way of saying the markets will fluctuate, which of course they will.
GL: It’s amazing how we always focus on how stock markets can go down in a hurry but very rarely on how they can go up in an awful hurry. That is why getting in and out of the market is a losing strategy – it is just impossible to know when the turns are going to come. Volatility and return go together – you cannot get one without the other. Getting the return without the volatility is so deeply attractive that the idea just won’t go away. But in the end, it’s just like alchemy – you can’t make gold out of lead. You can’t get a return without accepting some ups and downs. You just have to learn how to read financial headlines.
Headline: George Soros Gained/Lost $1 Billion How to read it: Soros has around $25 billion so what he does with his money shouldn’t concern most investors.
GL: To add, George Soros is a very well known short-term speculator. That means that he makes massive (often highly-leveraged – that is using debt) bets on the direction of financial markets. Sometimes these go the right way, sometimes they go the wrong way. This is not a strategy that will work for the other 99.9% of the population who are trying to fund a retirement.
Headline: Investors Are Dealing With More Uncertainty How to read it: The future is always uncertain. The past just feels more certain because now we know what really happened.
GL: The (short-term) future is unknowable. This is the big idea that we have to know, understand and accept about investing before we start. I don’t know where markets will end this year or what currency movements will be (there are lots of things I don’t know). But I am an expert at looking at people’s situation today, helping them decide where they want to go and giving them a clear path of how to get there. It's where we ultimately find ourselves that matters, and that is something that I have a pretty good handle on .
Headline: [Democrats/Republicans/current or past president] Caused X% of Economic or Stock Market Growth How to read it: Presidents or political parties don’t personally control economies or stock markets made up of millions of participants and trillions of dollars all wrapped up within a complex adaptive system. These things don’t come with levers that you can pull to make them rise or fall.
GL: Another important point is that economic growth and stock market growth are actually not correlated to each other at all. Even IF you were able to predict how an economy will grow (or not grow) under a certain president (and even the best economists haven't shown that they can do that), it would tell you nothing about what the stock market will do.
Headline: The Stock Market Enters a Painful Correction How to read it: Retirement savers rejoice as stocks fall on the week. Those with decades to save & invest should hope it continues.
GL: Stock markets fall = stocks on sale. Just think of it like walking into your favourite store and seeing everything marked down by 30% or more. The stock market is the only market place where our irrationality causes us to want to sell when things get cheaper.
Headline:[Permanantly-bearish pundit] Predicts a Market Crash Worse Than 1987 How to read it: Certain pundits are constantly predicting peril and end times for the markets and the economy so expect to read a few of these every week as they’ll continue guessing until they’re finally “right.”
GL: Bearish means pessimistic. Indeed, some people are always pessimistic and the thing is that being pessimistic just doesn’t square with the facts. The world is more prosperous and safer than ever before. Humans continue to innovate. 91 years ago, at the beginning of 1926, the US stock market stood at 12.65. Today it is roughly 2300. That relentless upwards march is a reflection of human ingenuity and entrepreneurialism.
Headline: The 10 Best Stocks to Own Right Now How to read it: Here are 10 random stocks we think could go up for reasons we are purely speculating on.
GL: And the writer of the article might well own these 10 stocks so it is certainly not unbiased investment advice. Next week it will be 10 different stocks, depending on how we feel.
Headline: Investors are Cautiously Optimistic How to read it: We’ve got nothing so we’re going to run this classic that gives no information whatsoever.
GL: This one really makes me laugh. Cautiously optimistic? I think it’s an oxymoron. Morgan Housel describes it as a special kind of oxymoron reserved for market commentators who need an out when their forecast blows up.
The key thing to remember about the financial media is that their sole purpose is to sell stories. Next time you find yourself reading an article forecasting a drop in markets or an increase in volatility, remember that headlines will always have a tendency to reflect immediate outlooks. They are usually driven by fear, optimism or just guesswork. Journalism rarely gets it right. Basic common sense tells us that this on not a sensible basis on which to make long term financial planning decisions. What IS sensible is to base your decisions on your life, your plans and your values. The news can’t help with that (I can though - so just drop me a line).