The Media Spin What makes the impact of news even more nebulous is this: There is almost always both good news and bad news about a stock. In addition, the news story itself almost always has both a positive and negative aspect.
Let’s say a company reports another in a string of quarterly losses. If the stock goes down, it’s due to disappointment that the company still hasn’t been able to climb into the black. If the stock goes up, it’s because the loss was less than the previous quarter. The action of the stock comes first. Then the news on the stock is tailored to fit the move by accentuating either the positive or negative aspect of the story.
The truth is that, except in cases of obvious causality (when the news triggers an immediate and decisive reaction), we never know for sure why the market or a stock does what it does. Since a stock is bought and sold by thousands of individuals every day, it’s reasonable to assume there is more than one reason causing its behavior. In fact, there can be a myriad of reasons, some knowable, others not knowable. Buy and sell decisions are often motivated by a host of non-news-related, silent triggers that are rarely cited by the media.
However, over the years we have been conditioned by Wall Street and the financial media to believe that stocks move up and down for identifiable reasons. This is the way the stock market has been covered by the media forever: Tie the event to whatever news makes it plausible. Completely ignored is the independent force that controls everything: The market itself and the emotions of those who respond to it. This media treatment of the stock market is so routine, so accepted, and so entrenched, that its validity is never questioned. Millions ask “What happened in the market today?” and millions respond with what they hear/read in the media, as if it were fact.
Stock market news is reported by news organizations, not by behavioral scientists, psychologists, or students of the subtleties of the market. The business of news organizations is to report news. They are trained to answer the “why” of things with logical explanations that make for neatly packaged, complete stories. They are well-intentioned, with little awareness that their market stories are misguided. There is far less excuse for advisors and brokers in the securities business who often give the same vapid explanations. They should know better, but most don’t.
The Media Wears No Clothes
I feel very alone in discussing this subject. The emperor has worn no clothes for such a long time, no one seems to care. But this is important. We’re talking about people’s money. If our net worth suddenly drops sharply, aren’t we entitled to an honest, knowledgeable explanation of what is known and, more importantly, what isn’t known? Why is truth in advertising more important than truth about our money?
It is a myth that what’s reported on market behavior by the media is fact.
It’s a myth that such behavior can be explained by knowable, identifiable reasons (surprises like invasions, tsunamis, and assassinations are exceptions).
Correcting such long-entrenched, widely held misconceptions is difficult. It’s unlikely to happen. I’m hoping those media sources with the most air-time and print space will try. Here are my suggestions.
In my view, every discussion on TV, radio, newspaper, magazine or the Internet that gives reasons for a big move in the market is unbalanced, incomplete, and misleading—unless it alludes to these six points:
- The stock market itself is the all-powerful final arbiter. The day, hour, or minute it feels the rubber band has been stretched too far, it’ll do something about it, not before.
- Human emotions, responding to the markets’ gyrations and triggered by fear and greed, likely play a key role.
- Worries over a wide range of overlapping factors, both fundamental and technical, may or may not be additional influences. (Future market historians may well cite long-standing housing and credit worries as major factors in shaping the market’s trend. The significance of their role on the particular day of July 26, however, is unknowable.)
- A market that acts randomly and irrationally cannot be explained logically.
- Except in cases of surprise, most news is irrelevant in explaining the market’s action on a particular day. The stock market leads; the news follows.
- The answer to the question, “Why today?,” is: “I don’t know—nor does anyone else.” The markets are complex and perverse. They defy definitive answers.
They Report, You Decide
In all likelihood, things will stay as they are. So it is up to you, the informed individual investor, to rise above the misinformed media.
If you are looking to the stock market to grow your net worth, you should be aware of the enigmatic nature of the phenomenon you’re dealing with—even if your news provider is not. When you’re watching or reading the whys of what happened in the market that day, know that the reporter is innocent and well-intentioned but clueless. What he presents as facts are guesses that may or may not be pertinent.
I know this sounds terribly arrogant. I don’t mean to be. On the contrary, if there ever were a situation that calls for humility, it’s dealing with the stock market. I hope investors develop a respect for the perplexity and primacy of the market itself and remember it is autocratic, not democratic. When it acts as you predicted, it is mostly coincidence.
Fortunately, the media’s daily ineptness is of less concern to someone who is truly a long-term investor—and maintains that long-term focus even when listening to the daily news. Big market moves may be inexplicable, but a long-term or dollar-cost-averaging approach precludes the need for explanations.
What can be said with confidence is that the one thing that is not random and irrational about the market’s performance is its basic, underlying, 100-year entrenched uptrend.
Focus on the long term and you can ignore the media’s distortions.
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.
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