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My Sunday Washington Post column this week looks at two of the major topics of financial news – Politics & Economics.

The column draws the counter-intuitive conclusion that these aspects of daily life are mostly meaningless to investors much of the time.

Under the headline Voters should pay attention to politics. Investors should ignore it, it looks at a few historical events that have been much more emotionally resonant than impactful to investments. These include wars, tumultuous presidential events, oh, and silly little non-events like the debt-ceiling debate of 2011 and the sequester of 2013.

Here’s an excerpt from the column:

“Most of the time, economic data is fairly benign. I don’t wish to imply it is meaningless, but it is not a driver of stock markets. Indeed, the correlation between economic noise and how equity markets perform has been wildly overemphasized. To quote Warren Buffett: “If you knew what was going to happen in the economy, you still wouldn’t necessarily know what was going to happen in the stock market.

The economic cycle sees a constant stream of news. Various data are released on a recurring weekly, monthly and quarterly cycle. Sometimes they improve; sometimes they degrade. These are minor and noisy fluctuations, often reflecting flaws in how the data are collected or seasonally adjusted.

There are many reasons why economic data are so noisy, none of which matter to the primary driver of your investments, namely corporate profits and equity valuations.”

While investors pay too much attention to Politics and Economics, they don’t pay enough attention to valuation and the development of bubbles.

 

 

 

Source:
Voters should pay attention to politics. Investors should ignore it.

Washington Post, March 8 2013
http://www.washingtonpost.com/business/voters-should-pay-attention-to-politics-investors-should-ignore-it/2013/03/08/e318f940-86a0-11e2-9d71-f0feafdd1394_story.html

Category: Apprenticed Investor, Psychology, Valuation

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.

9 Responses to “Why Investors Should Ignore Politics & Economics”

  1. formerlawyer says:

    Irony abounds. The top article in the Washington Post makes the same argument as the Wall Street Journal!

    Good post BR

  2. Note sure what you mean about WaPo / WSJ.

    Front page WaPo:

    U.S. adds jobs, braces for cuts
    The recovery is taking flight just as severe spending cuts threaten to clip its wings.
    Jobless rate falls to 7.7 percent

    Versus Front page WSJ:
    Employers Ignore Economic Clouds

    AND

    Top 5 articles WP:

    Jeb: Obama won by ‘dividing’ country
    President Obama at elite Gridiron Club jokes about sequester
    F-35′s ability to evade budget cuts illustrates challenge of paring defense spending
    Susan Rice as national security adviser? U.N. ambassador said to be front-runner
    ‘Oz’ the not-so-great or powerful

    Top 5 articles WSJ:

    Karzai Says Taliban ‘in Service to America’
    Wealth Over the Edge
    The Real Women’s Issue: Time
    JFK Mishap Renews Focus on Taxiways
    Why Are Kids Useless? Because We’re Smart

    ?!?

  3. Super-Anon says:

    “While investors pay too much attention to Politics and Economics, they don’t pay enough attention to valuation and the development of bubbles.”

    Again I’ll just point out that the bubbles are being allowed to form in order to achieve political and economic ends.

    What’s different about the current economic cycle, versus the last two, is that the political and monetary authorities have dropped all pretense about being anti-bubble — bubbles are now the primary objective of the monetary and political machinery we have in place because asset price appreciation is the only way we can continue to finance our debt in the near-term.

    We are no longer incidentally a bubble economy, we are deliberately a bubble economy.

    The system depends on bubbles for its continued existence and the people in power know it.

  4. ironman says:

    BR writes:

    There are many reasons why economic data are so noisy, none of which matter to the primary driver of your investments, namely corporate profits and equity valuations.”

    Amen, Barry!

    I think a lot of media reporting really screws up the differences between investing and speculating. As investors, we are assessing the fundamentals in making our basic decisions in shaping our overall investment balances, but as speculators, we’re occasionally trying to anticipate changes in those fundamentals, but more often than not, we’re really trying to exploit the noise we see in the market.

    Case in point from two weeks ago: the market’s reaction to the Italian election fiasco. Here’s a classic noise event that would have absolutely no impact on fundamentals for companies trading in the U.S. market, which we knew at the time, but suddenly U.S. stock prices dive anyway.

    A real investor doesn’t sweat it – it doesn’t affect them and what they’re doing at all. A speculator though would recognize it for the almost free money opportunity it was. Buy the next day, then turn around and sell what you bought after prices recover as you hope or expect they will. All you need is the cash you’ve set aside to take advantage of that kind of thing, be willing to take the tax hit on gains and pay the transaction costs, the stomach for the ride and enough of a clue to recognize the event for what it is with respect to the fundamentals driving the market.

    But when it’s reported in the media, it’s “bad for investors” (stock prices have fallen!) And when speculators take advantage of the time arbitrage opportunity, the result of which dampens the impact of the noise event upon the market, which makes the market a lot more stable place than it would be otherwise, somehow, that’s not good for investors or the market either (dirty, greedy speculators running up prices!) if you believe the media’s reporting.

    Come on now, media people, if you see an unclaimed $20 bill laying on the sidewalk, don’t you pick it up? [For the record, we recognized the opportunity, but didn't act on it because of the "cash set aside" aspect - we were still happy to point it out to others because, as investors, we weren't impacted by it at all.]

  5. formerlawyer says:

    Sorry Barry, I just read the headline, it was #1 this am in Business section, #3 this pm. mea culpa

  6. No worries —

    I should no better that those top 5 lists change all day !

  7. Frilton Miedman says:

    Looks more to me like BR’s article expands on the nature of WSJ’s politicized headline “Employers Ignore Economic Clouds” as the DOW breaches an all time high, U/E at levels not seen in almost five years….apparently they feel we’re still replete with “economic clouds” that need be focused to the front page.

    ~~~

    BR: The logistics of a Sunday column is its written a week before, submitted for editing Tuesday/Wednesday and then finalized Thursday. Notice I reference employment situation but dont get into any specifics of NFP? Thats because it was done long before the NFP came out!

  8. AHodge says:

    Ignore politics and MOST economics the daily monthly chatter you speak of and the tv
    my way is
    trade the long cycle
    you have to watch maybe not every day or even every week
    but watch for the top
    lead indicators flat inverted yield curve profits peak n decline
    the bubble will pop usually along when the economy tanks unfortunately a little before
    but you can work with that
    i do get some sector company news from media

    the only politics you NEED are probably “inside” info or grey area
    on key stuff like capital gains
    trade like the congressmen

    so yes to saying no to the daily chatter

  9. Ezra Abrams says:

    Old news, dog bites man
    maybe ten years ago, R Edelman in The new rules of money, 2nd ed ( a great book – but get the 2nd ed at the library) had a table of the 10 biggest up and 10 biggest down days on wall street, and he listed the biggest news story of that day or the preceeding day
    like zero correlation between news type (good or bad) and market direction (up down)

    and i’m sure R Edelman wasn’t the first by any means