Why smart people lose a fortune

By Barry Ritholtz   Article

Apprenticed investor: Lose the news

“Have you ever noticed how the stock market reacts differently to the same reported events? Why is it that we sometimes sell off “in response to rising oil prices,” but at other times the “market rallied, despite the rise in the price of crude”? How come a selloff was caused by a suicide bombing in Iraq, but a week later, the markets shrugged off an even larger, deadlier bombing? Is it possible that the markets are responding to forces other than the latest headlines? Short answer: Absolutely. Yes.

Longer answer: Keep reading.

As we discussed last week, it’s clear that predictions of pontificating pundits have an extremely short shelf life and can be safely ignored. But it’s not just the talking heads who can throw you off your game. The value of the entire financial news complex — both print and electronic — seems to be hugely misunderstood by investors. …

There are at least three problems with this approach:

  • First, news is hardly new. The vast majority of it is backward-looking, informing you as to what has happened already. Investing is about what is going to happen;  …
  • Second, … Did the FDA approve a new drug or not? The subsequent reporting is irrelevant; it’s the event that matters. …
  • Third, because news organizations often try to appeal to as many people as possible, they have a disconcerting tendency to catch various trends just as they are peaking.

Have a look at these charts provided by Neal Frankle, author of Why Smart People Lose a Fortune. They offer a compelling explanation as to why the mainstream media should not be the source of your investment strategy; in fact, they can often be a strong contrary indicator. ….”


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