Apprenticed Investor: Lose the News
Barry Ritholtz
06/16/05 – 07:10 AM EDT


Have you ever noticed how the stock market reacts differently to the same reported events?

Why is it that we sometimes sell off “in response to rising oil prices,” but at other times the “market rallied, despite the rise in the price of crude”?

How come a selloff was caused by a suicide bombing in Iraq, but a week later, the markets shrugged off an even larger, deadlier bombing? Is it possible that the markets are responding to forces other than the latest headlines?

Short answer: Absolutely. Yes.

Longer answer: Keep reading.

As we discussed last week, it’s clear that predictions of pontificating pundits have an extremely short shelf life and can be safely ignored. But it’s not just the talking heads who can throw you off your game. The value of the entire financial news complex — both print and electronic — seems to be hugely misunderstood by investors.

Even worse, many investors misapply what they hear; they ignore data, focusing instead on headlines and occasionally, the opinions. There are at least three problems with this approach:

  • First, news is hardly new. The vast majority of it is backward-looking, informing you as to what has happened already. Investing is about what is going to happen; what’s occurred in the past may be of interest, but it’s hardly germane to the investment process. Indeed, by the time the news is “out,” it already has been built into the stock price.
  • Worse yet, old news can have an impact on your thought process. That’s why I read The Wall Street Journal on the train home, and not on the way to work. Why? It forces me to recognize that the news is stale, and I avoid allowing it to influence my decision-making process. Instead, it becomes for informational proposes only (Yes, I really do this).

  • Second, the vast majority of news is irrelevant to your investing.Sure, the data points on occasion may be important, but the rest is essentially infotainment and filler. I find CNBC both informative and entertaining — but it’s not the basis of my investment decisions. This explains why there aren’t any hedge funds running money on the basis of what’s on TV.Even with situations that involve binary events — a yes/no FDA decision, a litigation outcome, an earnings report — it’s not the news coverage of these that matters so much as the actual data point.

    Did the FDA approve a new drug or not? The subsequent reporting is irrelevant; it’s the event that matters.

    Quite often, it’s not the news that matters, but the reaction to the news. Look at Intel’s (INTC) midquarter update. It was good all around, but the stock has since slipped. That’s because the improved environment, especially for laptops, was already well known. It was fully built into Intel shares.

    When we consider events of even greater historical significance, we discover something rather astounding: Over the long haul, the markets ignore things like Pearl Harbor, JFK’s assassination and even the Sept. 11 terrorist attacks. Gary B. Smith showed how after their initial response, the markets resume whatever their prior trend was.

  • Third, because news organizations often try to appeal to as many people as possible, they have a disconcerting tendency to catch various trends just as they are peaking.
  • Have a look at these charts provided by Neal Frankle, author of Why Smart People Lose a Fortune. They offer a compelling explanation as to why the mainstream media should not be the source of your investment strategy; in fact, they can often be a strong contrary indicator.

    Source: Why Smart People Lose A Fortune, by Neal Frankle
    Source: Why Smart People Lose A Fortune, by Neal Frankle
    Source: Why Smart People Lose A Fortune, by Neal Frankle
    Source: Why Smart People Lose A Fortune, by Neal Frankle

    Avoid the Headline of the Day

    The news machine needs to create an enormous amount of content to have product to sell. Hours on TV and radio, pages in print and on the Web. Remember, most media are advertising-driven, and it requires all that content to be able to sell all those ads. (That’s why jokers like me are on so often).Just think about some of the recent headlines and their impact on both markets and individual stocks. The CEO of a major brokerage firm resigns — who cares! Martha gets out of jail: Whoop-de-doo!

    The media focus on the “sensationalistic or scandalous, rather than market-moving,” observes Real trading diarist James “Rev Shark” DePorre. “Stuff like the firing of a CEO, the housing “bubble” or Martha Stewart’s latest travails may be interesting, but they don’t help you much with your investments.”

    I agree with Shark’s contention that the “media are at their best when they focus on emerging market trends.” You know, the stuff that has yet to make the magazine covers or major headlines. That may give you a push in the direction of an investable theme. Unfortunately, this sort of coverage is rare and often found in specialty magazines such as Wired, CFO and The Economist.

    There are exceptions to every rule, and this one is no different. The most valuable thing the media can do for you is to grant you an audience with people you might not have access to otherwise.

    It’s particularly useful to see or read the wisdom from those people who do not need the publicity and have no agenda. They are merely identifying issues that they believe need to be addressed and that often are not.

    This isn’t to suggest that you should blindly follow the star investors: Simply because former General Electric (GE) chairman Jack Welch or Berkshire Hathaway’s (BRK.A) Warren Buffett say something will happen is no guarantee it’s going to come true. When others are opining about what’s to come — even the greats — you should have a healthy skepticism.

    Still, I will closely listen to any investment giant who has a spectacular track record over long periods of time, meaning his or her performance is not the result of mere chance.

    1. Expect to Be Wrong 2. Your Fault, Reader
    3. The Wrong Crowd 4. Bull or Bear? Neither
    5. Know Thyself 6. Prepare for Battle
    7. Bite Your Tongue 8. Don’t Speak, Part 2
    9. The Zen of Trading 10. The Folly of Forecasting
    Check back for more of Barry Ritholtz’s
    Apprenticed Investor series

    A few examples: T. Boone Pickens on Kudlow & Cramer a year ago saying oil’s price rise was not a temporary phenomena; Julian Robertson on CNBC discussing the dollar; Former Federal Reserve Chairman Paul Volcker identifying structural imbalances in the U.S. economy in The Washington Post; and the Barron’s interviews with folks like Ned Davis, Ray Dalio, Walter Deemer, Seth Glickenhaus and others.Giving you access to such financial luminaries is one valuable service the media provide for investors. As for the rest, savvy investors know it’s mainly just noise and entertainment.

    Category: Apprenticed Investor, Financial Press

    Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

    29 Responses to “Apprenticed Investor: Lose the News”

    1. JB7456 says:

      Few people if any address this subject other than a drive by disparaging remark about lemmings, retail investors, polls, etc. At the other end of the spectrum is retail brokers telling prospective clients how complicated money management is and how their firm will be a beacon in the storm. Several times they have either caused the storm and/or taken the other side of the clients investment. Money and volume tell the story of a company and have some predictive value. Retail investors provide additional yet contrarian views. As the Wizard of Wallet Gordon Gekko said…”It’s all about money. Everything else is just conversation. Timely article. Thanks!

      A refreshing look at GG’s finer moments…

    2. MayorQuimby says:

      Great post Barry. This what makes your blog so fun and interesting.

      I see newsflow as a way for smarter money to take advantage of ‘dumber’ money. Smart money knows *what cheap is* and has already bought at a good price. They’ll use newsflow to attract heavy selling and buy into it. Smart money knows *what pricey is* and will use newsflow to attract a bid into which they can sell.

      I think it’s been 15 years of Fed moves that have driven the market action and looking back – all one had to do was to go long monetary injections and short inflation when it hit the street and you were just golden.

      But the most fascinating part of markets is that once you’ve identified a pattern, it’s usually already gone.

    3. Chief Tomahawk says:

      “A few examples: T. Boone Pickens on Kudlow & Cramer a year ago saying oil’s price rise was not a temporary phenomena; Julian Robertson on CNBC discussing the dollar; Former Federal Reserve Chairman Paul Volcker identifying structural imbalances in the U.S. economy in The Washington Post; and the Barron’s interviews with folks like Ned Davis, Ray Dalio, Walter Deemer, Seth Glickenhaus and others.Giving you access to such financial luminaries is one valuable service the media provide for investors.”

      Hmmm…….. someone dropped a bunch of names The Big Picture Conference should invite, methinks.

    4. Barry, this is absolutely THE BEST post you have ever written. All I can say is WOW. I’m learning something every day, and today, this has definitely benefited me. I remember something Jim Rogers said. “If the markets stop responding to bad news in a bad way, the the bear is over. If the markets stop responding to good news in a good way, the bull is over”

    5. boveri says:

      Good stuff — Barry only reads the WSJ on the way home in the evening. That is a creative telling point to be remembered.

    6. I wonder how many people see him on the train in the evening and think,”Who is this loser that reads the WSJ on the way HOME?”

    7. BTW, agree with you about the news. People shouldn’t trade news they should trade systems or methods.

    8. louis says:

      RIP Big Man Clarence Clemons

    9. bigbases says:

      Barry, awesome! You are absolutely right. The word “news” is a misnomer. I should be “olds”.

    10. Andy T says:

      Now, “this” is the Barry some of us used to flocked to….several years ago. Good stuff…from 2005.

      It stands the test of time.

    11. @MayorQuimby
      So are you hinting that technical analysis doesn’t work? You mentioned that when you see a pattern, it’s usually over. I believe you’re wrong. Jim Rogers is the greatest trend surfer of all time.

    12. ToNYC says:

      If you look behind the screen you see all these talking heads on hold, ready for their green light serving the media director’s time frame. A creative person who doesn’t own their own time is so dis-abled and is in need of rehabilitation. The best and rarest guests get TV done before 8 AM, no time to waste on media when real play opens each business day.

    13. rktbrkr says:

      A couple of observations:

      CNBC is a mine field for investors, it is a non-stop infomercial for a bull market.

      US government stats are suspect. CNBC and other MSM run with the headlines and then the many subsequent revisions are overwhelmingly down. You can’t expect the gummint to remain simon-pure reporting unemployment etc after pumping hundreds of billions into the economy and expect them to accept bad news without making adjustments to “nudge” the numbers in the desired direction. Unemployment got a .4% nudge downward earlier this year to mid 8s and there was great happiness, now we’re at 9%+ and there is gloom in Obamaland. When all else fails revisit the B/D adjustment!

      CNBC and some other MSM trot out NAR reports without any warning labels, there should be a flashing PIMP alert on the screen whenever any of these “experts” gets air time.

    14. Burnerjack says:

      This point is something I have always considered. News reporting vs. News/opinion manufacturing.

      Mr. Ritholtz, I find you to be very clever indeed. BTW, you sir have the most applicable Comments Disclaimer I have ever read. Absolutely brilliant.

      Back on point: while some truths may be gleaned from infortainment industry over the long haul, I find the real factors affecting the economies are both obsficated and “hiding” in plain sight. What is most interesting is the seemingly orchestrated misdirection of focus.

    15. MayorQuimby says:

      @Investorz- Not always – which is what makes it fun and interesting to follow.

    16. BR,

      these “Apprenticed Investor”-pieces are Gold (needless to say, if more, now (di-)vestors, read them, We’d be operating on a different Standard.)

      also, to your Point..

      “The man who never looks into a newspaper is better informed than he who reads them, inasmuch as he who knows nothing is nearer the truth than he whose mind is filled with errors and falsehood.”

      –Thomas Jefferson, letter to John Norvell, June 11, 1807.

      and, on the Tangent..

    17. ToNYC says:

      If you read about it from them, they made you think without you doing it. That could get dangerous!

    18. deanscamaro says:

      I happen to agree with you on this, Barry, but it brings a question to mind:

      Ordinary Joe Public is trying to make some retirement package grow into something he can retire on. He believes he doesn’t have much chance on having Social Security out there in the future.

      1. He works 10 hours a day and and sometimes weekends and doesn’t have time to do the research that is needed to manage his investments.
      2. He can’t depend on the news to help, for reasoning you have clarified with this piece.
      3. Trying to find a CD that might grow his meager savings is a laugh.

      Is this a subtle push by the investment community to get him to bring his savings to a “financial advisor” and pay him part of that savings to look at his nest egg once every 3 months and provide about as much valuable advice as the news?

    19. “1. He works 10 hours a day and and sometimes weekends and doesn’t have time to do the research that is needed to manage his investments….”

      “…doesn’t have time to do the research that is needed to manage his __________ …”

      Sounds more like a Slave, than a Citizen.

      or, differently, “OJP” has other, quite more pressing, Issues — He may want to reconsider buying into this– “trying to make some retirement package grow into something he can retire on.” –dreadful canard, in the first place..

    20. deanscamaro says:

      And guess what, that is the situation that most of the middle class fall into…….no way out.

    21. deanscamaro says:

      Sorry, I meant to say “…..middle and lower class…..

    22. dancingdiva says:

      Barry – after reading this piece I went back and read the others. A brilliant compilation of excellent advice. I think there’s room for one more article, though. It’s the importance of the most three most valuable and underused words in investing – “I don’t know”.

      I’ve found all too often the media, Wall Street economists and strategists as well as fund managers and individual investors feel it’s necessary to have an opinion. Sometimes I believe there are too many variables in play to have any degree of confidence; yet, most never say so. They are oh so confident – and often – oh so wrong. Yet, they are rarely called on their wrong calls afterwards.

      The ability to say “I don’t know” and a healthy skepticism for those who profess they do has saved me a huge amount of money over the past few years. Too many don’t understand that cash isn’t a “four letter word” during questionable periods in the market – and “when in doubt, get out” actually works. When you’re most certain – it’s usually the bottom or a top – at least in the short term.

    23. dean.., (& ..diva)

      They (in both instances..) need to come to grips with..

      “I know that most men, including those at ease with problems of the greatest complexity, can seldom accept even the simplest and most obvious truth if it be such as would oblige them to admit the falsity of conclusions which they have delighted in explaining to colleagues, which they have proudly taught to others, and which they have woven, thread by thread, into the fabric of their lives.” – Tolstoy

      or more simply put. . .

      “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” – Upton Sinclair

      or, maybe, they should read some of..

    24. dancingdiva says:

      Mr. Hoffer – I know it and you know it – but I don’t think the average guy does.

      And here’s an oldie but goodie for you – dating back over 300 years courtesy of David Hume:

      “When men are most sure and arrogant they are commonly most mistaken, giving views to passion without that proper deliberation which alone can secure them from the grossest absurdities”

    25. taketheredpillnow says:

      Tired but this is how I look at it.

      Any Financial transaction has 3 parts, A buyer, A Seller, and a Product (service).

      The way you recognize the byter is, they’re the ones who pay the money.

      People buy “news” papers and think they’re the buyers because they paid money, and the newspaper is a product that is designed to inform them.

      But the newspaper only gets 20% of revenue from subscribers. The newspapers, ALL newspapers, get 80% of revenue from Corporate Advertisers.

      So the Corporate Advertisers are the REAL buyers. And since they don’t take delivery of the newspapers, then the newspapers are not the REAL product (tired, please excuse all the capitals).

      The newspapers are Media, and are used to transmit the Real Product, your eyeballs, to the Real Buyer.

      So while you are an important part of the Media Model, your need for factual, unspun information is secondary to the needs of the real customers. And the shareholders.

    26. blackjaquekerouac says:

      i’m a little suspect when talking about “Pearl Harbor” or “9/11″ and our responses to those “mere events” as “no biggie.” The reason for the market and the economy being so “squishy” ytd is to me an election based on an ideology of “the appropriate response to 9/11 is now THIS instead of whatever it was you had before!” well, turns out turning everything on its head doesn’t work so well either. and now of course we have Fukushima and “The Arab Awakening.” Understanding these seismic events requires turning off the t.v. and the WSJ and utilizing something called “books.” needless to say “most of the financial elites haven’t heard of such things” so as we confront the “superior intelligence” as was said so eloquently in Star Trek “here it comes.” Greece it is people! Now…move along

    27. Joe says:

      Yeah….. But ….

      You can’t do a compilation of Apprenticed Investor without having “Protect Your Backside (Cover Your Assets) ” Top/Center. It’s a talisman for me and required reading .

    28. Topspin says:

      taketheredpillnow – thank you. that is brilliant and really opens the eyes to what is happening. its not often said as well as you just did. What are normal people to do? start selling their eye balls? get the “news” to pay them to see their content? I’m sure I see some ads in my periphery vision as I surf the internet pages, I never click them or read them, yet the content I am reading is advertising just as you say. The corps are the customers and the more fiercly the content can target the demographic and make them feel they are right, justified, under attack or whatever they will eat up every last word and feel the content is all on their side and speaking to them. I believe the media is one of the most vicious systems keeping america and americans from developing. the sand that america is built upon is wages and americans are sinking deeper in the hole every year while they read things that say they are right on track and the solution is 3 simple steps away, if they just did xyz….

    29. ToNYC says:

      Perhaps it might be better to assume that the media is better than any socially-active and orderly in its experience than any pharmaceutical product. The short message is you are the patient selling your critical thinking for the easy life and buying their content sending their pictures deep into your brain. My good professor Mc Luhan would add that the separation from former nervous system delivery is anesthesized as it goes in. Who doesn’t know somehow that we have bitten the Apple marked, “FREE!” and are now addicted to digital drugs in the electronic age?