Reading Financial News: The Top 10 Avoidable Distractions
If you’re like me, you’re bombarded daily by financial news that screams for your attention.
But a lot of what we read is either irrelevant, shallow, or incomplete and hence misleading and distracting from an investment perspective.
I’ve identified the top 10 distractions, the kind of stories that have no value or insight and can be easily avoided.
1. “The Market Moved.”
Or the other variations, such as “Asian shares hit a speed bump,” “China extends sharp rally,” etc.
These sorts of bland characterizations don’t mean much because they’re historical. It’s like saying it rained yesterday or that the temperature dropped to 5 degrees last night.
Single day moves rarely tell us anything about the direction of the market. And it’s the rare stock that becomes undervalued or overvalued in one day.
“News” like this serves no redeemable purpose and just gives lazy or shortsighted journalists something to report on.
2. “Jeff Bezos is $10 billion poorer.”
Why should we care whether Jeff, Bill, Mark, or some other ultra-rich person lost or gained a few billion because of a market move? It doesn’t affect the market value of our wallets. Plus I don’t think it bothers them much either since they are already squillionaires.
Are we supposed to celebrate that these tycoons “lost” a few billion? And what did they really lose anyway? The losses are on paper and once the market bounces back, as it always does eventually, these losses will be wiped out.
Still, outlets report news like this as though something momentous has happened.
3. “If you had bought . . .”
Had we purchased $1,000 worth of Amazon, Apple, or Tesla shares years ago, we would have made millions by now. Yes, we know. Why rub it in?
Are articles that make such observations supposed to make us regret all the other decisions we made or didn’t make?
I don’t understand the point apart from the massive and fascinating numbers involved.
Of course, with the wisdom of hindsight, just about everyone looks like a loser who missed an obvious buy call. But 10 years ago, who knew that Amazon or Tesla or Netflix would be so spectacularly successful?
If such news also included a system or indicators on how to pick mega stocks well in advance, well, that would be helpful. But that’s too technical and too complex for, well, just about everyone.
4. “This market pundit . . .”
“Experts” are conveniently trotted out to explain why the market is behaving in a particular way. The Pundit also pops up to offer long-term market forecasts. Typically, they look grave and serious and give some suitably vague predictions.
Why should we listen to them? Because The Pundit has credibility thanks to their prescient call of the dot-com bubble / global financial crisis (GFC) / taper tantrum / Fourth of July fireworks, etc.
My main issue with The Pundit is their inconsistency. It’s not that difficult to predict a crisis. The market will eventually crash. Calling that crash may be a product of luck or sheer persistence. It’s also called sampling bias. We all prefer to cherry-pick the data that makes us look good.
Has anyone asked The Pundit about their misses? Their poor market calls? Their hits-to-misses ratio? Wouldn’t that be a better gauge of The Pundit’s track record and whether we ought to pay them any attention?
Most crises are unpredictable. Nassim Taleb calls them black swans. They are huge, rare, and impossible to foresee. In boxing, they say it’s the punch you don’t see coming that knocks you out. If that’s the case, who knows when it will come or from where?
5. “This reliable indicator is flashing red.”
These news items are another favorite. An obscure number or concept is taken out of the cupboard, dusted off, and loudly proclaimed the Paul the Octopus of finance.
Why? Because said indicator anticipated three of the last four market crashes / booms.
These stories ignore the fact that historical performance is never replicated. The reason most of these indicators are rubbish? New scenarios render past trends all but useless.
The COVID-19 crisis is a classic example. So much about it has been unique. No market pundit today has experience with such an event: Its origins are biological not financial, the social responses — social distancing and lockdowns — are unprecedented in scale, as are the fiscal and monetary countermeasures. And the ultimate solution — a vaccine — is surrounded by uncertainty in terms of both timing and impact.
So there is no comparable event from which to extrapolate to anticipate the future.
6. “Warren Buffett . . . ”
Apparently, the Oracle of Omaha can do no wrong. Which leads to some inane reporting.
Buffett announced he was dumping his US airline stocks recently. Well, that’s what everyone was doing. And it wasn’t really a good move in hindsight as airline stocks recovered somewhat soon after. So not only was Buffett ordinary in his response, but he also sold too early.
More critically, billionaires have a vastly different risk appetite than the average investment analyst let alone retail investor. Their return requirements and investment constraints are not like ours. So why mimic their strategies?
7. “Stocks rallied because . . . ”
I am always amazed at how wise the media is after the fact. It can always invent some clever and seemingly plausible explanations for earlier market movements.
If stocks rally, it’s because of optimism on a COVID-19 vaccine, better retail numbers, more US states reopening, etc. If stocks fall again after a few days, it’s due to vaccine pessimism or disappointing retail numbers.
No one really knows. It’s all just opinion. It’s not as though financial journalists go out and interview a representative sample of investors to find out their rationales for buying or selling.
And the underlying assumption is that all investors are rational beings who immediately adjust expectations and act logically based on the latest news. But we know homo economicus is a myth. Investors are prone to all sorts of biases and cognitive shortcuts that keep them from “maximizing their utility.”
8. “The Paradoxes”
At the standard press conference after every quarterly US Federal Reserve meeting, a reporter repeats the same question that was asked in previous press conferences.
Is the Phillips curve broken and if so why? It’s become one of life’s enduring mysteries.
The Phillips curve is an economic concept developed by A. W. Phillips. The gist of it? Inflation and unemployment have an inverse relationship. Higher inflation is associated with lower unemployment and vice versa.
Yes, the curve is broken and there are many clear reasons why.
It’s not a paradox that wage inflation has been muted despite record low unemployment. There are a host of factors at work. The US economy has shifted from manufacturing to services, with a simultaneous loss of employee bargaining power; the gig economy has made contract workers ubiquitous; automation has lead to an excess supply of labor; etc.
Another so-called “paradox” making the rounds: the disconnect between Main Street and Wall Street. There was no “connect” to start with. The stock market correlates to economic performance three or four quarters later. And even that correlation — 0.28 — is a weak one.
These hardly qualify as paradoxes.
9. “The 10 Must-Have Stocks”
It doesn’t matter if the market has crashed or is at an all-time high, someone will always be talking up a few great stocks — undiscovered gems that must be bought today, unless we want to risk missing out on the next Amazon.
To be sure, a few of these picks may be great buys. But these recommendations tend to be based on sketchy information. Dig a little deeper and the analysis is often laughably shallow. A recommendation based on “fundamental analysis” means the call was made after a cursory glance at 12-month forward revenue, EPS / EPS growth, and the forward PE ratio. That’s it.
Some of these stockpickers ignore fundamentals completely when issuing their calls. They focus on the technicals — relative strength indexes, support levels, etc. — which few retail investors grasp.
Of course, the stockpickers rarely mention the risks and downsides of the stock. It’s all rosy forecasts and smooth sailing ahead. But really they’re simply peddling incomplete, misleading, and irresponsible takes as analysis.
10. “The company blew expectations as EPS rose X%.”
I am not suggesting that companies shouldn’t report their latest numbers. But instead of baldly stating the facts and stopping there, earnings reports should give the full backstory. Once we understand the background, often the results are not so straightforward, and the EPS “beat” doesn’t mean much due to two main issues:
- Companies have deployed massive amounts of capital on share buybacks. Over the last decade, US public companies have pumped $4 trillion into buybacks. The effect? The denominator in the EPS calculation declines, and as a result, the EPS increases, even if the total net income for the period is static. In fact, if enough shares are bought, EPS rises even as absolute net income falls.
So unless the story outlines what role, if any, share buybacks played in the EPS increase, we won’t know how much was due to organic growth vs. financial engineering or, indeed, if the story has any value or is yet another waste of time.
- CFOs are good at managing analysts’ expectation gradually downwards as the quarter progresses. So companies end up easily beating a low number. Companies should disclose the projected EPS at the start and end of the quarter.
But these are just two components of the EPS problem. Investors look at this EPS beat and start extrapolating for the next few years. But companies may not have cash lying around to pay dividends or buy back shares. In fact, if they received support from the US government, they won’t be allowed buybacks for a few years.
Of course, these are just 10 of the most common financial news goof-ups. There are undoubtedly many more.
But if we can watch out for these ones in particular and successfully filter them out, our daily reading will be more focused and productive.
For more insight from Binod Shankar, CFA, visit The Real Finance Mentor.
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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.
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It was an interesting article that I found to be a great basis to start filtering the always longer list of “must-read” financial news. Overall, I agree with your selection, but I believe that this filtering also depends on one’s focus areas. For instance, for number 1: “The market moved”, it, of course, doesn’t make sense if one considers that stock prices follow a random path. However, for chartists, this may be essential information. It could also be the case, for example, that for somebody interested in behavioural finance what Warren Buffett does is crucial. So, filtering financial news is also an individual matter.
Further ways of filtering financial news could be to filter by publishers and authors. Not all sources are as reliable, and some authors are more experimented and up-to-date than others. Of course, one always has to preserve the diversity of publishers and authors, so it isn’t about reading only articles from a given author published on a given website/newspaper.
informative article,
may we request you to share an article on what are all 10 must read financial info on every day morning
(I mean what all one should read to change the financial thinking behaviors)
Thank you for the great article and very valuable insights.
An article on top 10 ‘to dos’ when reading financial information would be really helpful (if not already written).
We are all adult professionals and very cognizant of the technology-driven intrusion, information overload, and continuously struggle with undesirable distractions. The smartphones and emails and social media tools invariably negatively impact virtually every facet of our lives with overwhelming speed, convenience, and connectivity. I wish you had provided concrete solutions or approached to help readers mitigate or avoid such distractions.
The panacea for the modern unregulated mind and flickering willpower is responsible for waywardness in dealing with these undesirable habits. The solutions lie in starting daily resolves and cultivating will power to deal with intrusions of all kinds. The first step in this direction is merely developing a formal code of etiquette on using the web, social media, and smartphone and timings. After all, we all know the importance of ROI on our finite resource-time and simple etiquette norms, such as best time of the day for focused work and standard etiquettes such as knocking before entering a room, greeting people appropriately based on the time of the day, and offering a warm handshake and not playing with our smartphone while talking or in meetings. Some basics to make a start:
• Prioritizing daily office routines and work and pure awareness and discipline can help check the urge and tendency of the mind to indulge in time-wasting activities such as reading news, playing videos, and interacting on social media and smartphones.
• Cultivate a habit when attending a meeting or office formal settings switch off your phone, turn on silent mode, and, better yet, keep it out of sight.
• Develop conscious awareness on not to check your phone or reply to a text when you are in the middle of a meeting or a conversation.
• We all strive to multitask to improve productivity, but the real sense is a significant drag on productivity, concentration, and focus. Working with concentration and focus can not only improve productivity but would allow us to save time.
• Have a specific time of the day for informal activities and social media and entertainment and stick to it.
• Avoid keeping the phone on the dining table at work or in-home unless something urgent is expected. Eat your meal with attention, and do not let extraneous thoughts or issues impact your ingestion and the company around you.
We must strive to have a balanced existence and live our lives so that we can have that balance—set conventions for going offline, like no calls after 9 pm and no smartphone before going to bed, or when we wake up also no work-related calls on weekends. Just as a Bird can fly only with two wings, people also must strike a balance in their personal and professional lives. We all must also have a judicious balance and dedicated time slots to achieve that end. Following these simple changes of habits would allow us to not only deal with the distractions but also develop strong willpower and focus on being good at both work and relationship and achieving enduring mental peace and rejuvenating experience.
Frankly, it is about maintaining balance, discipline, and understanding that we must set priorities and schedule activities each day and avoid interruptions. Without mental training, planned activities, and daily schedule, we will be like a battery, without time to recharge, we run the risk of depletion of energy stress and weariness. Suppose we are disciplines and always be aware of the imminent interruptions and act responsibly. In that case, we will have the energy, time, focus, and will to avoid the undesirable things we will not only be more productive, efficient and practical but also gain the power to command our time and stay energized and prevent activities and interruptions that restricts our capacity to think and act efficiently.
I second this
Avoid as much talking-head speculation about the plans of the Federal Reserve as you can. “Data dependent” means nothing. Data is history. Investing is about finding companies that know what they’re doing with product and money.