Interpreting Financial Babble

A professional fund manager once commented that half the research on his desk was a complete waste of time. All he needed to do was figure out which half was useful and he would immediately double his productivity!

Although it sounds like a joke, he was really making two points. Firstly, most research is backward looking rather than predictive, and most of this has little prospect of leading to better results. Secondly, a lot of ‘financial information’ is nothing more than hype and sensationalism masquerading as news - press releases that spin the facts, earnings announcements that fail basic mathematical scrutiny, and management explanations or projections that test the boundaries of probability and credulity.

Unfortunately, this isn’t just a problem for fund managers. If they are having a hard time sorting through the noise of the financial news, imagine how confusing it must be for the average investor. Compounding the problem is that most people don’t really read the news anymore. Nowadays, many of us barely get past a quick glance at the headlines.

For those of you tempted by this ‘headline surfing’ approach, here is a crash course in how to interpret what you are really reading.

Headline:	How to read it:
“Shares rose/fell today because of………..”	Millions of shares changed hands today because investors all have different goals, strategies, risk profiles, holding periods and ideas.
“[Popular economist/fund manager] expects market volatility to increase”	Saying that you expect volatility to increase at some point is like saying you expect it to rain at some point. Remember that volatility works both ways—to the upside and the downside—so this is really just another way of saying that the markets will fluctuate. Which, of course, they will.
“Markets suffered losses today: a sign of worse to come?”	No one ever really knows why shares rise or fall on a single day. The market is up on just over 50% of all trading days and down just under 50% of the time. You should never put too much weight on the performance of any single day.
“When will the Reserve Bank raise interest rates?”	Has understanding Reserve Bank policy ever really helped you make better investment decisions? Even if you knew exactly what they were going to do in the future, you still can’t be certain about how other investors will react.
“Investors face increased uncertainty”	The future is always unknown, and therefore, uncertain. The past only feels more certain because we know what actually happened.
“Investors panic as shares enter a bear market”	Don’t panic. Expected returns and dividend yields go up during bear markets. That’s a good thing for long term investors.
“Is [fashionable share of the day] a bargain buy?”	Chances are, by the time you see a fad stock being mentioned in the headlines, you’ve already missed your opportunity to buy it at a bargain.
“A perfect storm caused markets to fall”	Markets move for all kinds of reasons, but media outlets seem hell bent on delivering financial articles encased in hyperbole. As if we needed an independent example, how many ‘one-in-100 year’ weather events have we had this decade?
“[Permanently-bearish commentator] predicts a market crash worse than 1987”	Certain analysts constantly predict the end of times for markets. You should expect to read predictions like these every few months, as these ‘experts’ make for great media headlines and they typically keep guessing until they finally get it ‘right’.
“Interpreting financial babble”	A helpful user’s guide about how not to get misled by common media double-speak!