If you’re someone who tries to stay somewhat informed about financial markets and personal finance, you’ve probably had the same frustrating experience that I’ve often had, despite the fact that I’m a financial professional. You block out an hour or two to catch up on financial news and advice on your favorite big name sites or blogs, but then somewhere along the line you’re overwhelmed with the feeling that you can’t be sure whether what you’re reading is relevant to you, or whether it’s more fluffy info-tainment than useful insight, or even worse, you start to suspect that some of these sites and authors may have hidden biases or sales and marketing agendas. Sometimes you follow one too many links hoping to get a better grip on a certain topic, and suddenly you feel like you’re being pulled in half a dozen directions at once by sites that want to maximize their ad revenues.
Distinguishing signal from noise—useful content from a thousand forms of distraction and mediocrity—is almost never a walk in the park. Filtering it all takes time and effort. This is perhaps especially true with an always-on, real-time news cycle, extreme competition for eyeballs and attention from online journalists and the blogosphere, and massive information overload. That said, there are ways to make this task more manageable, and your reading time and choices more valuable.
Recognizing Flawed and Unreliable Writing
As I mentioned, this is a problem that even finance pros are faced with on a daily basis. Robert Martorana, in an interesting blog post from August 2016 that inspired this commentary, tells a story about a portfolio manager who advised him that “half the research on my desk was a complete waste of time.” After digesting this lesson, Martorana realized that he needed to work on what you might call his “BS meter”.
Rather than reading less, portfolio managers must learn to rapidly detect what is nonsense and move on. It’s a necessary skill when confronted with the hype and sensationalism now masquerading as news: There are press releases that spin the facts; there are earnings reports that ignore basic arithmetic and comments from CEO’s that test the boundaries of probability.
The problems for readers looking for solid info run even deeper than the very real issue of all of this hype and spin. We are manipulated by writers who attempt to influence readers in a variety of ways. Many investment blogs follow a tabloid formula of “simplify, then exaggerate”. The pseudo news and pseudo-analysis peddled by countless sites are fundamentally and, often, intentionally flawed. As Martorana puts it: “Fear sells, fact-checking is passé, misinformation is rampant, and track records of past predictions are irrelevant.”
Developing Critical Reading Skills
We need to develop skills as readers and critical thinkers to cope with such quicksand. Here are some questions you should be asking about any given article you’re reading:
- Is the article based on data or opinion? You need to know that right up front.
- Is it descriptive of past conditions or predictive of the future?
- Does the article have a testable hypothesis?
This isn’t to say that opinion pieces are a bad thing and that studying the past is a waste of time, or that articles without a scientific footing are always wrong or useless. Editorials have their place when they’re supported by facts and data. Analytical writing, on the other hand, that resorts to “editorializing” deserves your skepticism. “Think pieces” that analyze past market moves and draw conclusions from them to explain the present or future can sound authoritative and convincing. Because we are wired to crave explanations, we are often too quick to ignore data that doesn’t fit the story or to give up searching for other explanations. However, it’s important to pause and remember that “hindsight is 20/20” and to realize that basing an argument on historic events that produced well-known results is far easier than dealing with a more chaotic present or unknown future. Keeping this in mind allows you to see the limits of the article’s value as a guide to what’s happening now…or might happen tomorrow or next year. This strikes me as especially true and relevant in an investment context. As they say, “past performance is no guarantee of future results,” and you should be on the lookout for writing which suggests that the past is the key to the future.
On a personal note, I will tell you that practically everyone I sit down with these days wants to know what I think about the future of the economy and market. I tell them I really don’t know because I can’t tell the future. When they ask me about the direction of the stock market, I often quote Sir John Templeton, the so-called father of the mutual fund industry and one of the Great Investors. He said. “He doesn’t know the direction of the next 1,000 points, but he knows the direction of the next 5,000 points”. (The implication is that it is up.)
Become a Better Reader & Hone Your Ideas
In the service of becoming better investors, here are some additional concepts to help strengthen our critical thinking muscles and gain a deeper comprehension of a topic or argument:
- Understand the consensus.
Seek out the mainstream point of view on a given subject by consulting well-known financial news sources (Wall St Journal, Forbes, Bloomberg, NYTimes, etc.). It’s impossible to develop a counter argument or, for that matter, an independent perspective without this understanding. You want to know what the mainstream narrative is.
- Seek disagreement.
If you have a conviction about an idea or belief, make sure to consider “the other side of the trade.” Familiarizing yourself with the reasoning of someone with an opposing conviction will help you avoid what is called “confirmation bias”, which is when we interpret new information as confirming what we already believe. You will probably learn the most from people you disagree with. Berkshire Hathaway Vice Chairman Charlie Munger advocates the intellectual approach of Charles Darwin, who regularly tried to disprove his own theories and was especially skeptical of his own ideas that seemed most compelling.
- Question the narrative.
For various reasons, journalists don’t always frame a story in the most objective or straightforward way. This framing is often incomplete, misleading, or flat out wrong.
- Respect the data.
If you are researching corporate earnings and financial statements or economic data, look for sites that provide numbers, charts, and tables. If possible, go to primary sources rather than journalistic summaries.
- Avoid partisan interpretation.
Try to suspend your political leanings when reading news, and be wary of writers that allow their own political biases to shade their analysis. I tell clients now to separate what is happening in politics to what is happening in the economy. The economy has its own track and moves in a direction with great momentum and power. Political discussions change like the weather.
- Develop your own framework.
Here’s another one…and this one is hard. To the extent that you can develop an independent, cohesive view of markets and investment strategies and your own goals, the less vulnerable you will be to being overly influenced by media. Don’t think every news story is actionable. There are thousands of news articles published every day. Very, very few of them should ever compel you into action. Remember that doing nothing is an active decision when you’re an investor.
To wrap up this commentary, I want to quote for you some of the amusing examples of how to interpret news headlines. This is from Ben Carlson who writes in his article “How to Read Financial News Headlines”
Headline: Stocks Rose/Fell Today by 1% Because of _______
How to read it: Millions of shares traded hands today because investors all have different goals, strategies, risk profiles, holding periods, and ideas.
Headline: [Popular economist/fund manager] Expects Market Volatility to Pick Up Later This Year
How to read it: Saying you expect volatility to pick up at some point in the future is like saying you expect it to rain at some point in the future. And volatility works both ways—to the upside and the downside—so really this is just a way of saying the markets will fluctuate, which, of course, they will.
Headline: George Soros Gained/Lost $1 Billion
How to read it: Soros has around $25 billion, so what he does with his money shouldn’t concern most investors.
Headline: Markets Got Slaughtered Today: A Sign of Worse Things to Come?
How to read it: No one ever really knows why stocks rise or fall on a single day. The market is up just over 50% of all trading days and down just under 50% of all trading days, so you can never put too much emphasis on market action in any one day.
Headline: Investors Are Dealing with More Uncertainty
How to read it: The future is always uncertain. The past just feels more certain because now we know what really happened.
Headline: The Stock Market Enters a Painful Correction
How to read it: If you’re saving for retirement, you should rejoice as stocks fall on the week. Those with decades to save and invest should hope it continues.
Headline: _____ Could Cause Gold Could Rise to $1500/oz.
How to read it: Total guess. No one has a clue.
Headline: Investors Panic as Stocks Enter a Bear Market
How to read it: Don’t panic. Expect future returns and dividend yields to go up during bear markets. This is a good thing for long-term investors.
Headline: The 10 Best Stocks to Own Right Now
How to read it: Here are 10 random stocks we think could go up for reasons we are purely speculating on.
Headline: Investors are Cautiously Optimistic
How to read it: We’ve got nothing, so we’re going to run this classic that gives no information whatsoever.
Headline: Is [hot stock du jour] Facebook, Snapchat a Buy Here?
How to read it: Chances are, by the time you see a fad stock in the headlines, you’ve already missed the big move.
I know you get the picture. Bottom line: Know your own goals, know your time horizon, and don’t trade too much. Capitalist economies like in the US and other countries have a secret sauce and the market that tracks them will reflect that over the long-term.