As a way of giving ourselves a break from writing new Insights during the busiest portion of the summer it has become an annual tradition to repost this series on some of the various pitfalls of obsessively consuming news and information. These posts contain timeless wisdom that we constantly need to be reminded of, and we think they have become even more relevant over the past several years since first written in 2014. This is the final of four parts. Enjoy!
“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen.” – Warren Buffett
This week we wrap up our four part series on the harmful effects of news consumption. We started this series after reading a very insightful research paper by Rolf Dobelli entitled Avoid News: Towards A Healthy News Diet. In the paper, the author lays out fifteen dangers which we wrote about in our first three posts on this topic (Brain Sugar, The Cost of Paying Attention, & Side Effects May Vary). Some of the dangers appear to be more far-fetched than others, but all of them should give us pause and question why we consume news so frequently. More specifically, we should all question whether consuming news impacts our investment decisions and whether that impact is positive or negative.
The opening quote to this week’s Insight makes a fairly clear statement as to how one of the greatest investors of all time feels about the regular consumption of news. Warren Buffett has made his fortune by dogmatically sticking to his beliefs and convictions about the stocks he owns. Over the course of his long and storied investment career, he has dealt with plenty of major news stories and events which he has chosen to ignore. The full quote from his 1994 Chairman’s Letter paints this picture in more detail.
We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%...Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital.
Some pundits have even ventured to say that part of Buffett’s “edge” has been is geographical location away from Wall Street where he is better able to filter the news and information he consumes. In Buffett’s case, ignorance of the news when it came to his investment decisions truly was bliss. As we’ve seen over the past several weeks, Dobelli’s research would reinforce this belief. Of the fifteen dangers, several are extremely relevant to investing so we’ve grouped some of Dobelli’s dangers to create our own top two reasons news can hinder rather than help investors.
News Is 99% Noise
News outlets have to talk about something around the clock. As such, the majority of the material covered through these outlets is simply noise. Even the local news has the task of cobbling together twice a day the “top stories” from the past several hours. News outlets have become obsessed with breaking stories and speed of delivery, which is why it is refreshing (and comical) to see some people taking a different approach.
Our modern society has become obsessed with knowing what is going on in the world in real time even if that means filling our head with useless “knowledge.”
Ask yourself: What are the top ten news items from a month ago (that are no longer in the news today)? If you have a hard time remembering, you are not alone. Why would you want to consume something that doesn’t add to your body of knowledge? – Rolf Dobelli
So if we truly believe that the media is obsessed with around the clock storytelling, we must also believe that the vast majority of these stories are simply irrelevant noise. With that basis, it isn’t hard to see why regular consumption of the news hinders rather than helps us make wise investment decisions. Investing is a long-term, disciplined endeavor; two traits that aren’t shared by most news outlets.
News Confirms Our Biases
As humans (not robots) we naturally interpret the world through a filter we develop through our own set of unique experiences. Sometimes these filters/biases can be a good thing as we learn to avoid mistakes this way, but other times they can be harmful if they are somehow skewed. Biases grown out of personal experience are extremely prevalent when it comes to investing. Many people who have invested through the stock market roller coaster of the past two decades might have a biased view that stocks are a poor investment, while other investors who only started investing in the last five years might think stocks are a one way ticket to riches. Both of these biases are misplaced and both can be reinforced through selective consumption of news and opinion. Worse yet, an investor with this type of bias might stumble across a forecast, which will inherently be wrong, further solidifying their conviction and causing them to press the bet on their misplaced belief. This “confirmation bias” can be detrimental to reaching one’s long-term investment objectives. Again quoting Warren Buffett, “What human beings are best at doing is interpreting all new information so that their prior conclusions remain intact.”
Another bias we as humans tend to fall prey to is the fact we want the world around us to “make sense.” As such, we try to explain the world through cause and effect relationships. The problem with this bias is that often times, complex systems like the stock market can’t be boiled down to a simple cause and effect relationship. Dobelli unpacked this bias perfectly in his paper.
Our brains crave stories that “make sense” – even if they don’t correspond to reality. And news organizations are happy to deliver those fake stories. Instead of just reporting that the stock market declined (or increased) by 2%, TV news anchors proclaim, “The market declined by 2% because of X.” This X could be a bank profit forecast, fear about the Euro, non-?farm payroll statistics, a Fed decision, a terrorist attack in Madrid, a subway strike in New York, a handshake between two presidents, anything, really.
This reminds me of high school. My history textbook specified seven reasons (not six, not eight) why the French Revolution erupted. The fact is, we don’t know why the French Revolution broke out. And especially not why it exploded specifically in 1789. And we don’t know why the stock market moves as it moves. Too many factors go into such shifts. We don’t know why a war breaks out, a technological breakthrough is achieved or why the oil price jumps. Any journalist who writes, “The market moved because of X” or “the company went bankrupt because of Y” is an idiot. Of course, X might have had a casual influence, but it’s far from established, and other influences may be much more meaningful.
Although unsettling to some, we must accept the fact that changes in a complex systems like the stock market cannot be explained in a news article or better yet a 140 character tweet. Embracing uncertainty may seem unnatural but it is an under-appreciated and under-emphasized aspect of investment success. If an investor is constantly trying to make sense of the market, they will do themselves more harm than good in the long run by making emotional decisions at inopportune times.
Hopefully everyone enjoyed this four part series on the negative effects of being a news junkie as much as we enjoyed researching and writing about it. Like many of the posts we produce, the research uncovered for this series has forced us to take an introspective look at our own biases and shortcomings. Success in investing can be very difficult if we allow our emotions to get the better of us. Regular consumption of sensationalized news stories only acts as fuel to our emotional fire, further stacking the deck against our chance of investment success. When it comes to the news and the impact it has on our investments, ignorance truly is bliss.
Author Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.
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