Key steps to stay away from the swindled financial news
To understand how financial news clutter the market. Let me come up with crying baby analogy.
The baby is crying, and we don’t know why, because he cannot talk. I check to see if he’s wet, hungry, or sleepy. Then we consider less likely explanations: Maybe he’s too hot or too cold or his clothes are pinching him. Not understating his needs we try to divert the kids mind to entertain him with unique crazy ideas. Then we he starts to relax and cool down we hope that someday we’ll learn what the fuss was about.
Financial news is a lot like a crying baby (Because listed companies try to remain silent):
First, there is noise and commotion as prices rise and fall.
Next, we consider the obvious explanations, followed by the less obvious ones.
After that, we’re mystified, so we speculate and hypothesize. The action comes first, and the narrative comes later — if it comes at all.
Narratives Follow Prices
Financial news gives us narratives that are often correct, which is remarkable considering the pressures facing journalists, analysts, and financial researchers. Sometimes the process is abrupt.
But key here is till the time news is out everything is factored in the price. So you don’t have any advantage in the long term, rather you have a disadvantage coming from the price point.
So when a news item hits every newspaper it’s the time to understand that the bad has already happened and this might be the end phase with a lot of volatility. If you withstand the volatility in this phase you are good to go.
I learned to explain price movements in a way that made sense (technical charts help here a lot). Make long-term projections, diligently followed the fundamentals of each company, the industry context, historical data, and the factors driving the overall stock market.
This is a reliable way to approach stock analysis, and I gradually learned the rules of thumb. When a stock had strong price and earnings momentum, it’s expected it to continue in the short run. But because we were aware of history, we expected things to return to normal in the long run especially for cyclical stocks. Momentum for stocks was like momentum in sports: A player might get hot or cold, but they would eventually go back to their old self.
For growth stocks, follow current trends, as momentum drove prices up and down. For cyclical stocks, follow the industry cycle in the short run, and projected supply and demand in the long run. It isn’t foolproof, but it worked often enough to keep me interested.
Here are a few things that help me make sense of the amount of content we have today.
Bucket everything that catches your attention into a category of relevance. There’s a hierarchy of news and information that looks something like this:
The takeaway here is that good, relevant content is extremely rare. You should have no tolerance for the lower half of categories in this chart, and asking yourself where something fits before reading it is vital. Giving yourself permission to move on quickly provides more time to find something relevant.
Read stuff you disagree with, written by people you respect. It’s a prerequisite to have an opinion that is stating the opposing side’s view.
You have to seek out opposing views from people whose thought process you respect. That probably means people who you agree with on other topics. If you can say, “I know you’re reasonable, because you and I agree on X. So why do we disagree on Y?” … boom! You’re a step closer to reasonably figuring out the opposing view. Figuring out how the world works. Which is what we’re all trying to do?
Read more other than pure finance.
Investing is not the study of finance. It’s the study of how humans behave with money. When you realize it’s the study of human behavior, you see that it incorporates the lessons and laws from all kinds of different fields Psychology, Sociology, Statistics, Biology, History and Politics.
Rule of thumb: If it looks into how people behave in groups and respond to incentives, it’ll teach you something about investing.
Every piece of financial news you read should be filtered by asking the question, “Will I still care about this in a year? Five years? Ten years?” The goal of information should be to help you make better decisions between now and the end of your ultimate goals. Read old news and you’ll quickly see that the life expectancy of your goals is higher than that of the vast majority of headlines.
Understand that people play different games. A long-term investor sees a headline about selling stocks before earnings and shakes his head in disbelief. A trader reads an article about Stocks for the Long Run and thinks people are oblivious. Momentum investors think they’re both missing it. Bond investors think all three are crazy.
Actionable takeaways should be rare. Why read something if it doesn’t lead to an actionable takeaway? I’ll tell you why: Because the person writing the article has no idea who you are, what your goals are, what your situation is, or how it will affect you.
The best kind of content is empathetic to this disconnect. It pushes readers in a general direction while leaving all actions up to the readers themselves. This is rare, basically saying that, “I like this article, but it doesn’t tell readers what button to push in into their Trade account.”
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