By Michael McCarthy, Chief Market Strategist, CMC Markets Australia A challenge for investors is separating potentially market changing news from the “noise” generated by twenty-four hour trading and the voracious and sensationalist media cycle. Much of the “information” spewed at investors is not only unhelpful, it can be damaging. Wise investors take arms against a sea of media troubles. Some of the ways the news cycle can hurt investors: Sometimes, the news is just wrong. A recent example was the description of the situation at global commodity house Glencore. A theoretical view that if current low commodity prices were maintained in perpetuity, Glencore could face funding issues over the long term somehow became “Glencore is going broke”. In a perfect illustration of hyperbolic excess, a number of outlets ran with “the commodity markets Lehman Brothers moment”. Anyone making that comparison with a straight face displayed gross ignorance. Glencore’s balance sheet and funding facilities are public knowledge. A bare minimum of journalistic digging could have turned up the facts in minutes. Yet, somehow, a number of news outlets got this story completely wrong. This is not a trivial matter, and investors who sold out of commodity stocks on this “news” might feel rightfully aggrieved. The news can be irrelevant because the focus is wrong. The reporting of recent company reports throws up many examples. The key facts around Channel Ten’s result were the rights issue, the American deal and the Foxtel tie up, as well as the underlying earnings and revenue trends. Instead, a number of “business writers” focussed on the outgoing CEO’s salary package, largely irrelevant to the investment case. What was essentially good news for Ten shareholders became a nasty attack piece. Similarly, the reporting of Transfield’s AGM was dominated by a small number of protestors, in an attempt to apply pressure on the company and its shareholders for political purposes. While this may be of “news” interests, it is also irrelevant to the investment case, as Transfield’s operations are hardly a surprise to shareholders. No one is arguing these issues shouldn’t be reported – the problem arises when the side issues displace the information investors need. This is important because media reports can shape our investment behaviour. This can lead to framing errors, create false perceptions of peer behaviour, and reinforces what may be false conventions and consensus. All of which can lead to poor investment decisions. What can investors do? The most important tool in combatting the noise is an investment plan. An investor who clearly defines their circumstances and goals, and lays out a path, has a ready framework to deal with any market developments. Investment plans don’t have to be set in stone, and can change and evolve with an individual. The most important aspect of an investment plan is to have one. In looking at markets and devising an investment plan experienced investors with the skills and time may prefer the primary evidence – just the numbers. However, for most investors, getting expert help is the answer. This can help overcome another media bias. Reporters love pithy sayings. A popular saying recently is that investors should not attempt to “catch a falling knife”. It’s true that buying stocks that are sliding is a higher risk approach, even when they reach a price previously considered attractive. However, there are also risks in not buying. Investors who watched energy stocks like Oilsearch and Santos slide to lows without acting have now missed the opportunity to buy at multi-year lows. The good news is that the clear signal that industry takeover bids are sending about energy stocks remains intact, and current share prices still appear to be closer to cycle lows than highs. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
News versus noise
13:45, 29 September 2015