Posts filed under “Apprenticed Investor”
In a new project at Bloomberg I will interview some of Wall Street’s most influential thinkers. I’ll share more details with readers when we get closer to a launch date, but several consistent themes have become clear to me, even at this early stage.
The one I want to discuss this morning is the concept of noise.
Longtime readers of mine will recognize this theme from years ago. “Lose the News” is now almost a decade old; more recently, I discussed how to “Reduce the noise levels in your investment process.”
In speaking with strategists, money managers, economists and analysts one pattern that rapidly revealed itself was the schism between the commentariat and the markets. The noisy, click-hungry, traffic-seeking headlines of the online and TV financial news media often have a very different tone, focus and punch line than what is going in equity and fixed-income markets themselves. Indeed, the divergence between markets and the coverage is a key takeaway from these interviews.
I can’t emphasize enough the problems that investors succumb to due to the human love of narrative (see this and this). We can find smart articles and insightful commentary online, but when taken in its totality it is little more than a cacophony of headlines, conspiracy theories, invalid logical arguments and other distractions. It is impossible to keep up, much less debunk, the never-ending series of myths produced by the noise machine.
Here is a perfect example: U.S. equity markets hit bottom more than five years ago. The rally since then has produced a gain of about 175 percent and counting. During this run-up, the noise has led readers to expect the coming collapse back into the abyss and recession. The Federal Reserve’s zero-interest policy and quantitative-easing program were going to turn us into a third-world nation. That then morphed into how overpriced the equity markets had become, followed by a series of bubble arguments. Then about three years ago, the doomsters began saying the market had reached a top. The bull move was all but over, get out now before the next crash. It’s 1987! No, it’s 1929!
Yet the entire time, the markets have continued to rise.
Why is that? Markets respond to a variety of factors: Sentiment, valuation, liquidity, trend, demand, risk appetite, etc. At any given time, one or another of these, or some combination of them, is dominant.
The noise on the other hand merely reflects whatever meme is popular at that moment. The commentariat often resembles a hall of mirrors, with both good and bad thoughts and ideas getting bounced around and reflected continuously. Only on rare occasions, does the net result correlate with what is actually occurring in markets. Those instances seem like coincidences.
What purpose does all this noise serve? My conclusion after speaking with thoughtful, data-driven people is that its main purpose is to help create a two-sided market.
What noise are you listening to?
Our monthly letter to clients was picked up and excerpted by Barron’s Market Watch: A Sampling of Advisory Opinion. This is the section of the commentary relating to investor sentiment: Unsentimental Investors April Insight by Ritholtz Wealth Management 90 Park Ave., New York, N.Y. 10016 April 2: Anyone who thinks stock market sentiment is…Read More
While I have been busy kvetching about the weather, another payrolls report has snuck up on us. Estimates are for a 200,000 increase in nonfarm payrolls, the most since November, according to the median forecast of 90 economists surveyed by Bloomberg. But really, I have to ask: Why do you care? As I have relentlessly…Read More
How to know whether stocks are cheap or pricey Barry Ritholtz Washington PostTerms March 23, 2014 Last week, the Fed shared some widely expected news: It will taper more — keeping up a policy of slowly reducing its bond-buying program with the goal to wind it down by year’s end. It has telegraphed…Read More
> My Sunday Washington Post Business Section column is out. This morning, we look at whether stocks are cheap or expensive. The print version had the full headline Are Stocks Cheap or Not? How to Tell. The conclusion is surprisngly middle of the road. Here’s an excerpt from the column: “To know whether stocks…Read More
Have a look at the tables above showing the performance of various investments during the five years leading up to the financial crisis lows, and the five years after. It leads us to a rather fascinating exercise, looking at complexity, cost and performance. Let’s start with the worst performers pre-crash: US Real Estate and…Read More
There’s nothing wrong with 401(k)s, except the players involved Barry Ritholtz Washington Post March 9, 2014 This past year has seen a firestorm of criticism casting 401(k)s as mostly terrible. Their performance is too poor, and the fees too high, with poor investment choices built into most of them. Typical plans are complicated…Read More
Outcome or process — what investment focus succeeds over time? Barry Ritholtz, Washington Post, February 23 2014 “The reason investors and the investment industry rely on performance is because it’s simple, objective and easy to measure. But more importantly, performance goals, performance reviews and performance measurement are so common in business, in…Read More
> My Sunday Washington Post Business Section column is out. This morning, we look at the differences between Outcome or Process focused investors. The print version had the full headline Investing’s smart minority: The process people while the online version Outcome or process — what investment focus succeeds over time?. Here’s an excerpt from the…Read More
There are those who would convince you that it is somehow smart or in your best interest to be manically switching your investments around, back and forth, long and short, on a daily basis. To pay attention to this kind of overstimulation is the height of madness, even for professional traders. The most storied and…Read More