In his introduction to his most recent podcast, Dan Carlin talks about the news cycle over the past few months and realizes that what was a big deal just a few weeks ago may not even be on the radar today.
“It’s shocking how much of those stories that looked so huge a couple weeks ago have already passed and gone. But people got really worked up about all of them at the time…but they really weren’t that important to begin with…if the only place you got your news is from a monthly news magazine you wouldn’t have gotten worked up about any of this crap.” – Common Sense with Dan Carlin, Show 315, “War on a Whim?”
Carlin makes the point that years ago, much of what passes for news today wouldn’t even make it into weekly or monthly news magazines. But in our 24 hour news cycles, media companies make a fortune out of news. Financial news is not exempt. You don’t have to search hard for examples. Just using today’s cover stories on Bloomberg.com, a news source many in the finance industry read on a daily basis, look at the negative bias:
- Congress Reaches Spending Deal That Rejects Most Trump Priorities
- Markdowns in Manhattan, While Costs Grow in Brooklyn
- Why Everyone is Talking About the Troubles at a Tiny Canadian Lender
- SpaceX Launches Sensitive Military Mission, Nails Landing
- A $50,000 Chrysler Minivan Explains Slowing U.S. Auto Sales
- U.S. Manufacturing Expanded Less Than Forecast in April
Of six primary headlines on Bloomberg.com, five have negative connotations in the headlines. This is normal. In order for a reader of the website above to have a net neutral news day, that reader would have to be introduced to another news perspective that must have a very strong positive bias (consumers of political commentary have this option in cable TV). Of course, just having a positive bias for the sake of neutralizing other nonsense doesn’t meet our objective of providing sound data-based market perspective.
We are going to review and study biases and data in as we progress in this blog. Today, however, we provide just a little perspective on why all the negativity.
The following article is from early 2016 when the stock markets started the year in a correction. It’s really a simple “stay the course” article that is very well written with a different approach. I highly recommend the author, Morgan Housel, although he is now at different institution. You can find his writings now on Twitter at @morganhousel . Here is a link to the article I referenced. I jotted a few key points from the article and my takeaway below. http://www.fool.com/investing/general/2016/01/21/why-does-pessimism-sound-so-smart.aspx
A few highlights from the piece:
- In investing, a bull sounds like a reckless cheerleader, while a bear sounds like a sharp mind who has dug past the headlines. This goes beyond investing…Only pessimism sounds profound. Optimism sounds superficial
- Daniel Kahneman won the Nobel Prize for showing that people respond stronger to loss than gain.
- Why pessimism gets so much attention: Optimism appears oblivious to risks, so by default pessimism looks more intelligent…To the pessimist a bad event is the end of the story. To the optimist it’s a slow chapter in an otherwise excellent book…Pessimism shows that not everything is moving in the right direction, which helps you rationalize the personal shortcomings we all have…Pessimism requires action, whereas optimism means staying the course…Optimism sounds like a sales pitch, while pessimism sounds like someone trying to help you…Pessimists extrapolate present trends without accounting for how reliably markets adapt
Regarding the last point, it is also true that optimists often do not account for what can go wrong, but usually what goes wrong is remedied through the cycle, time, innovation or other. As Housel wraps up, “pessimists are the best indication of what’s unsustainable, and thus probably about to change, and thus the soil of what’s to be optimistic about.”
My takeaway: In a panic, we are wired to react or take action. Sticking with a plan runs counter to the emotions of investors watching the value of their portfolios fall. In investing, there are three primary courses of action. The first is to stick to a plan. To succeed one has to fight the urge to do something and wait until the markets come out on the other side. This option requires the most courage.
The second is to transition from investor to trader; make adjustments to the portfolio to play the scenario you think is happening. Most investors in this camp feel like they are being courageous but are really just transacting on their emotions. However, market dislocations do provide opportunities. The simplest one is to fight the urge to rebalance your portfolio at the time you feel it most in the gut.
Third, you can choose to become a bystander; just sell everything, hold cash and watch from the upper deck. If your decision reaches this point, you likely didn’t have a plan or shouldn’t have been in the market in the first place.
Of course, these are the extremes and you can do a little of everything. I would call a balanced approach between the first two—sticking with the plan and trading—an opportunistic approach. That is, let the plan do its work, but take advantage of some opportunities proactively. That might mean taking on a little more short-term volatility for a higher long-term payoff. This volatility is why stocks have a higher long-term return potential over high quality bonds and cash. Remember those monthly periodicals you used to read?