'I heard it in the news, so it must be so': Fisher's financial mythbusters
That, along with 'this time it's different', has to be one of the more expensive phrases in the English language. One tip to avoid falling prey to harmful fads: if you read or hear about some investment idea 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.
That doesn't mean news should be ignored. Rather, learn to interpret it differently and more correctly, which overall and on average can give you an investing edge.
First, reading news tells you what everyone is focused on - a valuable service. But to make a successful market bet, you should know something most other people don't. An easy way to start is simply by knowing what everyone else is focusing on - and looking away.
THE PERILS OF SELLING ON BAD NEWS
The stock market is an efficient discounter of all widely known information, so news is likely already reflected in current stock prices. And the longer something appears as a headline, the more its power to move markets has been sapped.
That doesn't mean if bad news comes out, stocks can't drop, but trying to time short-term swings can be perilous.
And initial reactions are often overdone, so 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. Selling on bad news alone can mean buying high, selling low and potentially missing out on a rebound.
If everyone is focused on something, you know you can safely ignore it and look the other way - at what people aren't focusing on, that actually may have material future market-moving power. If you can do that, you can have an edge over other investors.
News is a good sentiment indicator. Sentiment is key because over the next 12 to 24 months or so, it's effectively interchangeable with 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.
But measuring sentiment is more art than science. Lots of people use consumer confidence indices, but they're backward-looking.
Since stocks are forward-looking, knowing how people felt in the past tells you nothing. However, if you scan newspapers daily, you can get a good feel for general mindset, a broad-brush 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 of a bear market. Inbetween sentiment is quite normal, and sentiment can swing fairly broadly within a bull market over short periods.
News can be a good source of information - if you know how to interpret and use it. Most media outfits are for-profit businesses, and their bread and butter is selling advertising.
To do that, they need eyeballs - and the more eyeballs they deliver, the more advertisers are willing to pay.
Bad news sells, so news programmers know they must lead with fire, mayhem, riots, robbery, murder, intrigue. Put 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 maximise profits.
USEFUL GROUND RULES
Knowing how the media operates, you can 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 people expect and what you think is likely to happen. It's that gap between reality and expectations that will drive stocks.
Don't be a contrarian
Just because the media says something, it doesn't mean the opposite is true. It just might mean the expected impact is under- or over-stated. 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 telling the story straight may not always get eyeballs, so they may include an exciting narrative that obscures reality or use anecdotes which may not be statistically significant.
Ignore adjectives, adverbs and 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, but ideology is another form of bias that can blind you. Vary what you read, and be an equal-opportunity sceptic.
Follow those ground rules and you'll be a better, more informed consumer of media. Don't ignore media - use it to your advantage.
Ken Fisher is founder and chairman of Fisher Investments.