The Stock Market and the Media: Part 1

Investors are faced with a daily barrage of business news. There's keen competition over who can break the story first. The clear inference is that the news matters—that keeping abreast of the news, especially as it relates to one’s holdings, is one of the keys to investment success.

One of the worst things that can happen to a long-term investor is to be instantly and totally informed about his stock. In most cases, spot news fades into irrelevance over time.

What’s relevant is what the market decides to do. The news follows the market, not the other way around.

The Media's Mis-Focus

One big challenge faced by individual investors is dealing with misleading information. The financial media’s inept handling of news is a constant irritant to me. Perhaps I’m overly sensitive because, unlike most business reporters, my background is in stocks, not news.

The media’s lack of insight in reporting financial news is on display 24/7, but it is most glaring on big move days. On Thursday, July 26, 2007, the Dow Jones industrial average fell 450 points. It had been on a tear most of the prior year, climbing over 3,000 points from mid-July of 2006 to mid-July of 2007. During that steady rise, stocks climbed the typical “wall of worry”—growing weakness in the sub-prime lending and housing markets, worsening borrowing conditions, slowing economic growth, and so on. The Dow reached a historic high of 14,000 on July 16, 2007, but in the following week reversed itself with a vengeance. It suffered one-day losses of 149, 226 and 208 points. But the big hit came on July 26, when the Dow plunged 450 points to its low, closing down 311 on huge volume.

On that evening’s news, the media struggled with explanations. The News Hour with Jim Lehrer on PBS is among the most prestigious, reliable news sources on the air. I rarely miss it. Jim Lehrer, Gwen Ifill, Ray Suarez, Margaret Warner, Judy Woodruff, and Jeffrey Brown are all consummate professionals. On the night of July 26, award-winning 30-year veteran reporter Ray Suarez asked his two guest experts to explain why the stock market plummeted that day.

The choice of guests—two economists—negated from the get-go any insightful answers. It reflected the misguided thinking of all media everywhere: That a meltdown in the market must be tied to the news of the day. Interviewed were Thomas Lawler, a housing market consultant, and Diane Swonk, chief economist for a financial services firm.

Since the news that day revolved around housing and credit problems, these were logical choices—except for the fact that the market is illogical. For a full 10 minutes, both guests spoke eloquently about what they know, which is not the stock market.

However, nothing that they said could not have been said the day before, the week before, or the month before. They were never asked, “But why today?”

This same inadequate explanation was repeated by media outlets throughout the country. Reasons were given by everyone except those who have insight into investor behavior, the complexities and randomness of the stock market, and the futility of trying to reduce explanations for the market’s actions to one or two factors. Reporters who didn’t know were asking analysts who didn’t know. The result was a public that didn’t know. But none of the parties knew that they didn’t know.

But Why Today?

So, why was it that by 2:40 p.m. on Thursday, July 26, the Dow had lost 450 points—when the news background was exactly the same as it had been a week earlier when the Dow topped 14,000? In fact, the same bad news on the credit and housing markets had been dogging the market not for days or weeks, but for months.

What was there about this particular hot summer day in July that suddenly caused frenzied selling with news that had been ignored for so long?

The answer, of course, is that no one knows. But since the news that day was “old hat,” it’s reasonable to assume something else was going on. Based on behavioral studies, if not just plain common sense, it’s likely that investor emotions played a role—probably a dominant one. Fear and greed are highly contagious. Both are quickly activated by sudden, extreme price moves. The intensity of the selling and the steepness of the decline make investors believe that their worst fears are about to become a reality. As prices plunge and momentum accelerates, their instinct is to sell to protect profits and limit losses.

In other words, a major catalyst for the carnage is the unnerving action of the market itself.

Non-News News

Part of the problem is that, while some news does involve sharp and sudden stock reactions (only when it involves surprise), most of the never-ending flood of daily news is routine, insignificant and meaningless in terms of durable impact. It is important to PR firms, journalists, TV reporters and traders because it gives them a means of making a living.

But to the long-term investor, it is little more than filler and noise.

I’m talking about news of quarterly earnings, most acquisitions, litigation, layoffs, product recalls, strikes, management changes, broker buy and sell recommendations and upgrades and downgrades, short interest, insider selling and so on. Then there’s the non-stop stream of statistics on the economy.

These news topics are all important—they are what shape the underlying direction of a stock and the overall market. But there are few news stories that, standing alone, have long-term significance. What’s important is repetition or the lack of it. The long term is made up of a lot of short terms. When one news story, let’s say a report of higher earnings or a decline in the trade deficit, is confirmed or negated by the next news release and then the one after that, we begin to get a trend with some possible long-term consequence. Sometimes it takes years for such a trend to develop.

This article is excerpted from “The Dick Davis Dividend: Straight Talk on Making Money From 40 Years on Wall Street,” Copyright 2008 by Dick Davis.