Ten Years, Twenty Headlines

Jim Parker, Outside the Flags

Have you read the news today? Chances are there’s something happening in the world with the potential to keep you awake at night. But it’s one thing to follow the news, it’s another to act on it in a way that can backfire on you as an investor.

Journalists define news as what’s novel, startling, eye-catching, unusual or conversation-starting. Media companies use news to maximise attention and help their clients, the advertisers, to sell their products and services to you.

While news coverage also unquestionably plays a civic function, much of what is given prominence in the media day-to-day is consciously workshopped by editors to trigger an emotional reaction and build engagement.

For long-term investors, this presents a challenge. How do you differentiate between genuinely important, far-reaching and reliable information on the one hand, and cynically chosen clickbait and inconsequential beat-ups on the other? Put another way, how do you tell the difference between signal and noise?

One approach is to look at past headlines in an historical context and ask yourself how you would have fared if you had acted on those in your own portfolio.

The 20 headlines below are drawn at random from a Google search from the past 10 years, starting with the global financial crisis of 2008. Notice how many of them use dramatic, emotively-loaded adjectives and how many are purely speculative.

• ‘Stocks Plunge Worldwide on Fears of Recession’, 23 Jan, 2008; NY Times

• ‘Markets Braced for More Economic Turmoil’, 6 Oct, 2008; Telegraph UK

• ‘WHO Declares Swine Flu Pandemic’, 11, June, 2009; BBC News

• ‘Asian Economic Outlook “Bleak”’, 30 March, 2009; CNN

• ‘Housing Market a “Time Bomb”’, 15 June, 2010; The Australian

• ‘Stock Markets Face “Bloodbath”’, 26 Aug, 2010; Telegraph UK

• ‘Europe’s Money Markets Freeze as Crisis Escalates’, 2 Aug, 2011; Reuters

• ‘Europe’s Debt Crisis Puts Australia at Risk’, 10 Nov, 2011; News.com.au

• ‘Australia Faces Growing Risk of Recession’, 21 Aug, 2012; The Australian

• ‘Bloodbath to Hit Australian Real Estate’, 19, Jan 2012; News.com.au

• ‘Australia May Be on the Brink of a New Collapse’ 18, Aug, 2013; Guardian

• ‘For Stocks, Last Six Months Could be Tough to Match’, 1 July, 2013; CNBC

• ‘Are We Facing Another Financial Crisis?’, 18 Nov, 2014; The Conversation

• ‘Australia on Road to Recession as Car Industry Closes’, 11 Feb, 2014; SMH

• ‘Australia Faces 50% Chance of Recession By 2017’, 25 March 2015; SMH

• ‘Why China’s Stock Market Meltdown Could Hurt Us All’, 8 July, 2015; Time

• ‘RBS Cries “Sell Everything” as Crisis Nears’, 11 Jan, 2016; Telegraph UK

• ‘Brexit to Bring Recession and Contagion’, 27 June, 2016; Business Insider

• ‘A Trump Win Would Sink Stocks’, 24 Oct, 2016; CNN

• ‘Storm that May Cause the Next Crash is Brewing’, 16, Oct 2017’; The Street

To be fair, many of those headlines accurately reflected concerns in some corners of the market at the time they were written. For instance, swine flu may have turned into a global pandemic. The Euro Zone crisis of 2011 and 2012 generated real fears of a break-up of the single currency zone.

But we need to put these into events into a wider context. Here are six observations:

• First, understand how markets work. Breaking news is quickly built into prices. Often by the time you read about an event, the markets are worrying about something else. (To illustrate this danger, look at global shares over this 10-year period. In 2008, the MSCI World Index delivered a negative return of just over 25%. But it rose in seven of the next nine years to deliver an annualised positive return for the decade of just under 7%.1 )

• Second, understand how media works. Competition for eyeballs has intensified in recent years as online news and the mobile devices have put real-time information on tap for everybody. With the facts already known, news coverage increasingly becomes dominated by speculation and opinion.

• Third, ponder on the motivations of, journalists and instant pundits. Noise is their currency. What’s important in their world is not so much what is happening, but that there is always something happening. Otherwise, they feel like the fire brigade without a fire to put out.

• Fourth, accept what you can and can’t control. News can be diverting and interesting, it’s true. And there’s nothing wrong with taking an active interest in world events. But as long-term investors, acting on news that is already priced into markets can be counter-productive. The risk is something else then happens and all you’ve achieved is to realise a loss.

• Fifth, focus on what you can control – like how your assets are allocated across and within shares, bonds, property and cash, the degree of diversification in your portfolio, what you pay in costs and taxes and the regular rebalancing of your portfolio.

• Finally, all of this is easier if you have a financial advisor who can keep you disciplined and true to your original intentions. Because they know you, understand your risk appetite and are aware of your goals, the story always starts with you and not with what’s in the headlines.

None of this is to downplay the tragedy of real events or to deny the magnitude of whatever is happening in the world, but taking a human interest in global affairs and looking after your own welfare need not be incompatible concepts.

The Oracle of Omaha

In his much anticipated annual letter to Berkshire Hathaway shareholders, Warren Buffett took aim at those "Wall Streeters" charging high fees, and estimated more than $100 Billion dollars had been wasted over the last decade in the search for superior investment.   Here is an article from Bloomberg's Noah Buhayar on Buffett's scathing criticism:  http://bloom.bg/2lGv8ow  

Should I be Worried?

There’s a lot of political news (or noise) around at the moment, with the Trump transition, the to-ing and fro-ing over Brexit and Australia’s continuing leadership instability. But what does it all mean for your portfolio?

Of course, everyone is entitled to their own political opinions, so we’ll park that conversation right there. You may, however, be surprised how little relevance changes in government have on the performance of the financial markets.

From weeks before the U.S. election right up until today, talking heads have been telling us how significant this will be for capital markets. First, the pundits warned us of an imminent market slump. Then when the markets defied their expectations and rallied after Trump’s victory, they crafted an explanatory narrative of deregulation, infrastructure stimulus and tax cuts. Now, with markets going nowhere, the sages are blaming high U.S. stock valuation.

History strongly suggests these folks should pour themselves a tall glass of something stiff and be roundly ignored by us all.  There are many reasons why this is so, but let’s remember the 4 most important lessons history (especially the last 12 months) has taught us:   

1.     Predicting the future is extremely difficult.

It is extremely difficult to predict the outcomes of macroeconomic events and even more challenging to predict how those events will impact financial markets.  The share market is made up of millions of participants, each using all the available information and expectations of the future to push asset prices to a very close estimate of the present value of future cash flows.

To make an investment based on a prediction is pitting your knowledge/guess/gut feeling against the collective knowledge of all market participants.   It is important to realise that your opinions and any information you hold is already mostly incorporated into current prices.

2.     Investing is always uncertain.

The future is mysterious and there are risks inherent to that.  Our success in managing those risks will determine how successful we are financially.  We never know when the next correction or bear market will happen, but uncertainty is a good thing because it allows shares to provide returns above bonds and cash.

As Soren Kierkegaard said “Life can only be understood backwards; but it must be lived forwards.”  Which is why, when looking back on times of market upheaval, we wonder how few saw the signs and naively praise those who claimed to.

3.      Disciplined investing isn’t easy.

The last 12 months have provided a number of ups and downs in world markets, but remember, investors in shares are compensated for taking on the uncertainty of short term returns.  To receive this compensation though, shares occasionally need to lose value.

Volatility is not your enemy, it works in the favour of the long-term investor.  High volatility in the short-run provides rebalancing opportunities while returns over the longer term tend to be less volatile.  The long-term feels like an eternity to live through, but those that maintain discipline will be rewarded.

4.      If you’re feeling uncertain, read over your financial plan before reading anymore headlines.

Online portfolio access along with human nature makes logging in to check your portfolio valuation the first response during times of market upheaval.  However, reviewing your financial plan would be a better use of this time as a carefully prepared plan will have taken those periods of volatility into account, and will have done so without worry/stress.

We use Monte Carlo analysis in our plans, a programme that runs thousands of scenarios, each drawing historical returns and volatility levels at random to generate the range of outcomes that show the probability of reaching your goals.