Welcome to the information age! We can probably find out anything we want to on the internet. Millions of pages of information are available on everything from healthcare to sports to home plumbing to investing and more. All of it available at your fingertips, quite literally through your phone.
Will this make you a better investor?
Unfortunately, only if you are able to discern which information you should trust. And therein lies the challenge. A myriad of self-interests (by the authors and publishers) are represented in newsletters, blogs, news articles, interviews and webinars.
Let’s explore a few of the contributing issues and why you should show caution as you click on a link for “the greatest stock recommendation ever made.”
How far writers go to produce narratives
Lately there has been a lot of financial press about a possible impending market downturn. The stories have grown, and more and more journalists are participating.
Is this forecast a likely prediction? We just don’t know. No one mentions that part, do they?
What we do know is that if you are a long-term investor, you should remain invested through downturns, keeping your portfolio in a position to capture the longer-term upside when it occurs.
More and more prognosticators are writing articles about a downturn. The sheer volume seems to provide credibility. That is, until a series of events happen that highlight the lengths writers go to in order to produce a particular narrative.
The Wall Street Journal published an article with this headline on November 22: “Bridgewater Makes $1.5 Billion Options Bet on Falling Market.” Eye catching.
When you actually read the article, you find that it says, “It couldn’t be determined why Bridgewater made the investment.” This might be the nugget of golden truth in the article, but how many read the article to that point? Or at all? Did they just note the headline and draw a conclusion?
Additional statements in the article indicated that the position was being used to bet on market developments tied to political forecasting. (And yes, that is a tenuous set of links in any case — and an unproven set in this case.)
While many such articles are published, most funds quietly continue to go about their business with no direct response. However, this article was met with a rebuttal on social media platforms by Bridgewater’s co-chairman and co-chief investment officer:
There are reasons behind transactions that you’re not aware of
When an article is written about a single transaction from third-party data, you really don’t know what the firm is trying to achieve with the transaction. It may be noteworthy in its large size. But when seeing the raw data, it is impossible to know whether the trade was a hedge or a pure bet. (In today’s markets, by the way, the majority of such trading leans towards hedging or complex transactions that are not pure bets.)
You don’t see if there are other parts of this trade in other segments of the market that when integrated with this position may show something different. In fact, it may be an offset against underlying holdings that you are not aware of and the firm does not disclose.
You also don’t know if a trade is driven by specific client activity, thus requiring a specific trade. And nothing in this type of decision is indicative of a specific call on a market or security direction. You just don’t have enough information to know that.
The financial press equally does not know that. They may have a glimpse at some transaction data, but they still are unlikely to have any knowledge of all of the factors above. As a savvy consumer you should be wary of such reporting.
Headlines are written to attract, not inform
The other issue in the press is the depth of the description of the headline. From traditional press and printed papers or journals, right through to today, headlines have typically been written by someone other than the author of the article.
Initially they were crafted by editors or copy editors to make sure they fit the column space and layout in the newspaper.
Today they need to catch your attention and cause enough interest to make you click the associated link. It is increasingly the case that headlines are not a summary of the article but rather an attention-grabbing device to get more clicks on links, which is the new measure of the success of an article.
For all of these reasons, the headline itself is not informative, so anyone gleaning information from headlines is likely not well informed.
The Bridgewater article mentioned repeatedly that the author did not know the basis for the trade. But this might have been overshadowed by the headline and the first several paragraphs of the article, which made no mention of that.
Anytime you are drawn to making an active trading bet as a result of an article or recommendation, it is a good idea to stop and think about the benefits of such transactions. When you execute a transaction to buy or sell a security or group of securities, you typically pay a commission and/or a custody fee. These fees benefit the brokerage. This benefit is the one sure thing within the transaction. Whether the trade will benefit you is unknown.
In all of this, there is a lesson that keeps surfacing. Rather than looking at articles that build reasons to buy or sell certain securities or groups of securities, if you are a long-term investor, staying the course is probably a prudent way to maximize your return.
It is very difficult to time the market. Statistics even for professional active managers show pretty significant underperformance. SPIVA reports that in the U.S., 78% of large cap funds underperformed the S&P 500 over five years. Statistical history suggests the odds are very remote that a trade generated by a specific news article will somehow benefit you.
It is even less certain that you will be able to capitalize on an outside event driving the market in a specific direction in a specific timeframe.
Many of the current crop of downturn articles are based on political predictions and possible market impact. Such predictions are made from all sides with all sorts of ramifications, so this is not a commentary on a good or bad or market-friendly political outcome. Rarely are such events realized and captured in the market so directly. There are just too many other factors that have a far greater impact on the market returns. These political events may be too far in the future to even predict with any reasonable accuracy. And if the event itself happens, it is not clear that the market will respond in a short, measurable and expected way.
Clearly the same lesson keeps bubbling to the surface. Stay the course. Understand that this will benefit you the most in the long-term. And use a great deal of discernment in reading the financial press and clicking on eye-catching headlines.
If you have any questions about the topics covered above, reach out to Wipfli Financial Advisors.