A portfolio manager once told me that half the research on my desk was a complete waste of time. “Figure out which half is garbage and you’ve just doubled your productivity,” he advised.
His point was that most research is backward-looking rather than predictive. Reading obscure financial information may look and feel like productive work, but most of this content has little chance of leading to better results.
Nevertheless, many of us plow ahead, reading news and research until our eyes turn red. After all, reading is easier than critical thinking, and it may impress people if you are up to date on a wide range of financial subjects.
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: press releases that spin the facts, earnings reports that ignore basic arithmetic, and management explanations that test the boundaries of probability.
It is worse now that investment blogs have embraced the golden rule of tabloid journalism: simplify, then exaggerate. Pseudo news and pseudo analysis clutters the web, making it harder to stay well informed.
Fear sells, fact-checking is passé, misinformation is rampant, and track records of past predictions are irrelevant, according to Jeff Miller, president of NewArc Investments, who blogs at Dash of Insight. He writes extensively about how superficial journalism is shortchanging readers of financial news. Miller suggests focusing squarely on the future since you do not get paid for yesterday’s news.
Unfortunately, you’re pretty much on your own when trying to learn to read financial news effectively. The web is full of articles discussing how to detect political bias, while the professional investment literature discusses how to dissect financial statements. How to skillfully read financial news gets little attention.
Three Questions to Ask
- Is the article based on data or opinion?
- Is it descriptive of past conditions or predictive of the future?
- Does the article have a testable hypothesis?
These are tedious questions to answer, so I asked five of my colleagues for insight on how they separate the signal from the noise.
- Understand the Consensus: You need to grasp the conventional wisdom in order to bet against it. This becomes easier once you’ve done the groundwork on a specific investment thesis. After you catch up on the relevant news, you might want to jot it down. Brian Gilmartin, CFA, founder of Trinity Asset Management Inc., does this diligently on Fundamentalis, where he tracks corporate earnings: “I publish for myself — it forces me to organize my thoughts.”
- Seek Disagreement: You need to understand the other side of the trade. This means reading opinions that contrast with yours in order to avoid confirmation bias.
- Question the Narrative: Reporters are under intense deadline pressure and often frame issues in a way that is confusing or distorted. As Marc Gerstein, director of research at Portfolio123, who blogs at Forbes, said, “Reading too much financial news is counterproductive. The narratives are often incomplete, misleading, or flat out wrong.”
- Respect the Data: Charts, tables, and numbers are good places to start for corporate results and economic data. Always check the primary source when possible. “My models are based on data, so I prefer charts to commentary,” Gerstein noted.
- Avoid Partisan Interpretation: Turn off your political bias when you read and interpret the news, and be wary of commentators who have political agendas.
- Develop Your Own Framework: Before you read the news, you must have your own framework in place for decision-making. Otherwise, you’ll be unduly influenced by what you read. As Ed Stavetski, founder of PCM Partners LLC, put it, “You must have an independent view of the markets or the media will force a view upon you.”
Tips for White Papers
When reading long reports and academic research, reviewing multiple articles on the same topic is better than random reading. To do this, sort content by topic, save papers in folders, schedule weekly reading time when possible, and read in batches.
Dealing with Politics
Effective interpretation must be nonpartisan but does not ignore politics. In fact, some portfolio managers use political interpretation as an edge. Gerstein believes that politics can be a leading indicator because it reflects the mood of the country. “The political eventually determines the economic. It takes a long time to play out, but it eventually works. Listen for the key narratives in the market,” he said.
Stavetski is quick to point out how the media is slow to recognize public anger. It is now conventional wisdom to say that the presidential campaigns of Donald Trump and Senator Bernie Sanders revealed deep discord in the United States, but Stavetski pointed this out in 2015. He likes to read unconventional websites because they “find the potholes first.” These sources may have agendas, but that doesn’t mean they’re wrong. It just means you have to dig through a lot of garbage to find a worthwhile warning sign. This process can serve as a kind of “torpedo alert” for news that is under the radar of the mainstream media.
I like to look for stories that defy the political leanings of a news source. For example, a key turning point was when the Wall Street Journal started reporting on income inequality. This shift in news coverage was followed by broad public attention on the minimum wage and later by margin pressure at certain retailers and restaurants.
What Tools Do I Use?
The list below shows some of my favorite forums but is by no means comprehensive. For more detail, please see the slide deck at the end of this article.
- Abnormal Returns: Consistently excellent links.
- Briefing.com: Stock and bond content for portfolio managers.
- RealClearMarkets: Many links, small space; a Craigslist for financial news.
- The Reformed Broker: Snappy headlines and bold opinions from Josh Brown.
- Retirement Researcher: Wade Pfau, CFA, produces work that is academically rigorous.
- Michael Kitces: Practical and prolific, and always a blue shirt.
- David M. Blanchett, CFA: More credentials than anyone I know; publishes faster than I can read.
- FactSet Earnings Insight: Weekly PDFs with 15 or more charts on aggregate revisions and estimates for the S&P 500. Simple, authoritative, and free.
- FactSet Cash and Investment Quarterly: Cash flows, capital spending, debt issuance, and research and development for the S&P 500 (also see Buyback Quarterly and Dividend Quarterly).
- Fundamentalis: Gilmartin’s thoughtful, opinionated analysis cuts through the numbers quickly and accurately.
- Dash of Insight: Miller provides exhaustive research on the effectiveness of economic forecasting and a comprehensive weekly outlook.
- FRED Dashboard: The US Federal Reserve Economic Dashboard (FRED) allows you to pick your favorite charts and save them in a dashboard. You can then download everything into PowerPoint with the click of a button for client presentations.
Capital Market Assumptions (CMAs)
- AQR: “Alternative Thinking: 2016 Capital Market Assumptions for Major Asset Classes”: Deep theory and great writing from Cliff Asness.
- JP Morgan: “Long-Term Capital Market Assumptions 2016“: A comprehensive chart pack.
- Stock screening at Portfolio123: Gerstein knows fundamental research from the bottom up and has an effective, logical, well-documented process.
- YCharts: Use the correlation tool to see what’s driving the market.
- Portfolio Visualizer: Perform factor analysis of exchange-traded funds (ETFs) and mutual funds to evaluate beta exposures.
- feedly: A feed reader to organize your blog content.
- Advisor Perspectives: A mix of practical and academically rigorous ideas. Editor Robert Huebscher maintains high standards.
- Daily briefing from Convergex: Nicholas Colas and Jessica Rabe provide original and entertaining coverage. Convergex also publishes lengthy guides to world equity markets each quarter.
For more insights, the presentation, “Six PMs Describe How They Read the News,” is available via Scribd.
Robert Martorana, CFA, presented a webinar, “How to Read Financial News More Effectively: Tips from Six Investors,” on 7 September 2016.
If you liked this post, don’t forget to subscribe to the Enterprising Investor.
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image credit: ©iStockphoto.com/Valeriy Kachaev