The latest "Apprentice Investor" column is up at TheStreet.com. Its called "Lose the News."
This column warns investors to be wary of what they read and hear in the Financial Press.
Here’s the ubiquitous excerpt:
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.
Prior columns can be found here.
Apprenticed Investor: Lose the News
Barry Ritholtz has published a great story on TheStreet web page. I found it through The Big Picture blog. This is one of the best market related stories I have read lately and I think it is absolutely mandatory reading for every trader or investor. It…
Barry,
Great article. It’s been a long time since I’ve read something where I kept saying, “Right On!” and “You Nailed It,” so much.
I think the print financial press is much better than the cable business shows — mostly because a publication like Barron’s will allow the space needed to fully explore an investor’s thinking. TV is nearly worthless, except for the rare interviews such as the Julian Robertson one you mentioned, or the few with John Templeton I recall from years past.
The folks over at http://www.elliottwave.com have alot of insight into this contrarian indicator sort of stuff. They serve a small niche of the financial newsletter space to free your mind from the mainstream media and the “insightfull” headline stories that plaster the newstands. Once you begin to understand the psychology involved in this process you understand that the media is only reflecting the extreme sentiment of the public at the time. Remember the extreme pesimism about the US dollar in the last week of Dec 2004. You couldn’t find a mainstream financial publication that had anything good to say about the dollar. It was a forgone conclusion that there could not be any hope for the dollar. 6 months later, our oracles are eating crow.
News stories that “the market sold off because of rising oil prices” have always seemed silly. What, did the report go to every trader and ask, “When you sold stock today, why did you do it?”
There is no one sentence answer for any activity that’s the aggregate of millions of individual decisions.
Barry,
Great minds think alike. ;-)
At the end of the day, there are only two variables that affect stock prices, as defined by the broad market averages for indexes like the Standard and Poors 500 : (1) the earnings for the S&P 500 along with its dividend yield; and (2) the yield on the long Treasury bond.
A few years ago, I developed my own database testing this hypothesis. I aggregated 40 or so years of data (based on monthly closing prices for the S&P 500 index) including the earnings for the S&P 500, along with its dividend yield and input another column for the monthly yield on the 30-year U.S. Treasury bond.
I then ran a regression model testing the usefulness of those variables. Each of those two variables were highly statistically significant forecasters of the ending value of the SD&P 500. (Between them, they explained about 87% or so of the monthly variance in stock prices).
Put differently, tell me where the yield on the long bond and the earnings for the S&P 500 will be a month from now and I’ll tell you, within a very tight range of tolerance, where the closing price for the index will be.
Nice thing is that you can also calculate standard deviations of “reasonable value” to determine when the market is a screaming buy or sell, as the case may be.
Ignore the news, which is nothing but noise to begin with, and pay attention to the numbers, and you’ll do fine.
Best,
Tom