Media and the Market

The Investment Masters understand the need to maintain an independent thought process and not get swept up in the emotions of the market at any one point in time.

As humans have evolved to register pain more sensitively than any other emotion our fear of loss is much greater than our desire to gain.  Peter Bevelin in 'Seeking Wisdom - from Darwin to Munger' noted:

"Research shows that we feel more pain from losing than we feel pleasure from gaining something of equal value and that we work harder to avoid losing than we do to win" 

"Our brain is wired to perceive before it thinks - to use emotions before reason. As a consequence of our tendency for fear, fast classifications come naturally. Limited time and knowledge in a dangerous and scarce environment make hasty generalisations and stereotyping vital for survival. Waiting and weighing evidence could mean death."

Newspapers embellish bad news to sell papers. It's no wonder investors panic when they read front page news stories about Brexit, Trade Wars, Double Dip Recessions, European collapse etc. The average investor gets caught up in the emotion of the crowd and sells in panic.

In the 'Psychology of Intelligence Analysis', Richards Heuer noted "Information presented in vivid and concrete detail often has unwarranted impact, and people tend to disregard abstract or statistical information that may have greater evidential value.  Statistical data, in particular, lack the rich and concrete detail to evoke images, and they are often overlooked, ignored or minimized". It's often why investors act on negative news stories without considering the actual probability of an outcome, such as the historical probability of a market crash.

“People are always predicting the end of the world, but the only things that end are the people; the world keeps going” Arnold Van Den Berg

"For 200 years pessimists have had all the headlines even though optimists have far more often been right.  Arch-pessimists are feted, showered with honours and rarely challenged, let alone confronted with their past mistakes"  Matt Ridley

The bias against fear is amplified when we have experienced losses or market declines in the recent past. Known as 'Recency Bias' humans have a better memory for recent events, events in which they were personally involved, events that had important consequences, and so forth.  This fear of loss is one of the key reasons the average investor significantly under-performs the index - they sell at the bottom and they buy near the top when things feel comfortable again. 

Warren Buffett touched on the topic in his 2004 letter when he noted that investors should have earned juicy returns over the preceding 35 years just by piggy-backing corporate America's terrific results.  Instead many investors had experiences ranging from mediocre to disastrous.  In part, this was due to untimely entries after an advance had been long underway and exits after periods of stagnation or decline [looking in the rear-view mirror].

The Investment Masters recognize that the best time to buy stocks is when everyone is pessimistic as bargains are going to be more abundant.  Buying quality businesses with good franchises and solid balance sheets should ensure long term success regardless of market volatility.  It is weak markets that set the stage for high future returns.  When the headlines are screaming SELL it's a good time to look for bargains.

"Because bad news sells, the media has a pessimistic bias. Over many years, a large percentage of the severe problems predicted by the media never materialised, or proved to be far less severe than predicted" Ed Wachenheim

"Media outlets are quick to present us with one crisis after another, along with constant economic and political worries. With the help of the Internet and many television stations, bad news circles the planet in no time. With the right twist, plain old bad news begins to look more and more like an imminent catastrophe and for many investors, the perfect reason to sell their stocks! Good news, on the other hand, remains largely unnoticed since it seems to represent a less valuable source for ratings and clicks." Francois Rochon

“I’d suggest you not read the newspaper [headlines].” William Browne

"Headlines lead to headaches for the unfamiliar." Frank Martin

"Ignore the latest dire predictions of the newscasters. Sell a stock because the company's fundamentals deteriorate, not because the sky is falling." Peter Lynch

"The media has an interest in translating the improbable into the believable. There is a difference between the real risk and the risk that sells papers. A catastrophe like a plane crash makes a compelling news story. Highly emotional events make headlines but are not an indicator of frequency. Consider instead all the times nothing happens.” Peter Bevelin

"Financial crisis are like thunder storms - you hear stomach-jolting thunder after lightening has struck; rarely do the media and masses telegraph financial catastrophes in advance." Allan Mecham

On most occasions the media commentary is just noise.  Stocks move for all sorts of reasons and at times no reason at all.  Humans have a bias to attribute reason to random phenomena. Richards Heuer noted:

"If no pattern is apparent, our first thought is that we lack understanding, not that we are dealing with random phenomena that have no purpose or reason.. Because of a need to impose order on their environment, people seek and often believe they find causes for what are actually random phenomena ... Events will almost never be perceived intuitively as being random; one can find an apparent pattern in almost any set of data or create a coherent narrative from any set of events'. 

It's important to not be trapped into the blind belief that all price movements convey noteworthy news.

“Ignoring the maelstrom of the media – perhaps nothing is more preposterous than the explanations commentators give for price movements on Wall Street on any given day – makes it easier to focus on what is important” Leon Levy

“Markets often do things that defy logical explanation – but people keep explaining them anyway. Why don’t we ever hear, “The market rose today, but no-one knows why?” Howard Marks

“It’s a rare day when a journalist says, “The market rose today for any one of a hundred different reasons, or a mix of them, so know one knows” Philip Tetlock

"So much of what happens in the market, in the short run, is just random, but this is seldom acknowledged. There has to be a reason the market went up or down yesterday, so the Wall Street Journal and the other papers call up analysts and money managers and ask them why. What you usually read in the paper is simply a logical fallacy" Ralph Wanger

"It's important not to prioritise news stories, since they give my brain reasons to act, often without providing real substance" Guy Spier

Often, by the time the media are onto a story, it's already gone mainstream and the crowd is involved, the herd has already acted.  It's important to not get caught up in groupthink and maintain an independent point of view.

“The idea that people affiliated with Wall Street know something. My mother is a classic example. She watches “Wall Street Week” and she takes everything they say with almost a religious fervour. I would bet that you could probably fade ‘Wall Street Week’” Paul Tudor Jones

"Whenever something is really pounded or when something is skyrocketing and it is on the front page of the New York Times, no matter how much you agree with it in the long term, you have to reverse yourself for a while.  The dollar for instance, was on the front page of the New York Times three or four time recently.  I am terribly bearish on the dollar, as you have heard, but I have enough sense to know that when it is in the popular press, I should not be selling dollars"  Jim Rogers

“The rest of the print and TV business press are notorious pilers on. A classic case was during 1979 and 1981 as oil prices and inflation surged. Numerous books were published by experts forecasting hyperinflation, depression, and a collapse of the dollar. At one point, 7 of the top 10 books on the bestseller list were about inflation and how to survive it. Even wise investors like John Templeton gave speeches saying 7% to 8% inflation was inevitable. Of course, decades of disinflation, not inflation, were about to occur, during which both stocks and bonds would soar” Barton Biggs

You'll often see front page news about some analyst or fund manager predicting a market crash, out of control inflation or some other geopolitical event that will de-stabilise markets.  Most forecasts are wrong.  I'd always suggest checking the forecaster's track record of success before taking a further step.  And it's worth remembering someone always predicted the last catastrophe - most likely not the same person who'll predict the next.  Don't be fooled by randomness.

"One of my greatest complaints about forecasters is that they seem to ignore their own records. The amazing thing to me is that these people will go on making predictions with a straight face, and the media will continue to carry them" Howard Marks

"When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle's scathing comment: "You don't know how easy this game is until you get into that broadcasting booth." Warren Buffett

Most of the Investment Masters do read the papers however they keep an independent mind and don't get caught up in the emotions of the media.