Wednesday, June 13, 2007

The News is....Do the Opposite of What the News Says

I was pleasantly surprised to see the US markets up substantially today -- "the biggest one day gain of 2007" the media report.

To what do we owe this great day? Well, if you follow the daily financial media reports, then you'll see a few reasons put forward for the price jump -- declining bond yields, increasing retail sales, and diminishing concerns about inflation.

But that's today. Yesterday, per the financial media, investors were frightened when the 10-year bond yield symbolically breached 5%. According to the AP Business Wire today: "Rising bond yields amid inflation concerns had been pummeling stocks since last week."

Too often, the media is unhelpful for investors. Explaining events after the fact means little for future prices. In fact, future prices tend to do the opposite of what the news implies.

When the media is negative is actually the best time to buy. The chart to the left demonstrates how negativity in the media, this time around 9/11 and the war in Afghanistan, was inversely correlated with market returns. I quantified negativity by counting negative words (fear-related) in the Nightly Business Report online transcripts. A simple regression analysis found a significant inverse correlation between the prevalence of negative words in a transcript and the market's performance over the next week. No offense Paul Kangas and Susie Gharib, but your broadcast is useless for the average investor.

By the way, the above chart appears in my upcoming book, "Inside the Investor's Brain" (available from Wiley on July 9th).

When amateur investors hear the media experts predict a slowing economy after a sharp drop in the market, they get scared. When scared, they are more likely to sell. The financial news is better avoided by sensitive investors - those who might get scared at exactly the wrong times.

The media has numerous rationalizations, on a day-to-day basis, for the market's volatility. Beware. Paying attention to this information can be detrimental to your wealth.


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