Financial Headlines

In my article A Noob’s Introduction to Investing, I mentioned that it’s very dangerous to pay attention to broad market headlines. While reading Nassim Nicholas Taleb’s The Black Swan, (a sprawling, thought-provoking, messy book which I recommend) I encountered the following anecdote:

One day in December 2003, when Saddam Hussein was captured, Bloomberg News flashed the following headline at 13:01: “U.S. TREASURIES RISE; HUSSEIN CAPTURE MAY NOT CURB TERRORISM.”

Whenever there is a market move, the news media feel obligated to give the “reason.” Half an hour later, they had to issue a new headline. As these U.S. Treasury bonds fell in price(they fluctuate all day long, so there was nothing special about that), Bloomberg News had a new reason for the fall: Saddam’s capture (the same Saddam). At 13:31 they issued the next bulletin: “U.S. TREASURIES FALL; HUSSEIN CAPTURE BOOSTS ALLURE OF RISKY ASSETS.”

So it was the same capture (the cause) explaining one event and its exact opposite. Clearly, this can’t be; these two facts cannot be linked.

It’s a funny anecdote. One of the things you notice when you follow the markets is that there are a lot of Official Numbers. This is usually things like manufacturing data, employment data, GDP data, etc. Major financial companies will try to estimate these numbers in advance, and the average of the estimates is called the “consensus.” So let’s say the consensus estimate is 9.1% unemployment, and the actual employment numbers come in at just 9% unemployment. What should happen?

If you said the market should go up, because the numbers were better than expected, you’d be right – half the time. In reality, the numbers can go any which way, even on days when nothing else is happening. The headlines on days when Official Numbers are released are informative. If the market goes the same way as the news (if the unemployment numbers were better than expected and the market goes up), then they have their explanation. But if the market goes the wrong way (unemployment numbers better than expected, market still goes down), they will single out some element of the data and that becomes the explanation.

The simplest explanation for wrong way moves is simply that “the market” had a different consensus than the experts, and that it was only revealed after the fact.

All this means is – ignore speculation in headlines (Market falls on weak employment data is *not* a factual headline). It won’t help you think clearly about your positions, and will usually cause you to do exactly the wrong thing.

A Noob’s Introduction to Investing

I believe the single most important skill for early retirement is being a competent investor. There’s a whole universe of skills that can save you money, but most people in retirement will be earning their income either by investing in standard securities (stocks, bonds, ETFs), or by renting out property.

I’ve been investing for two years now. That qualifies me as slightly more than a rank amateur. However, I’ve learned quite a bit over this time and now when I see people asking “How do I start investing?” I have a few thoughts to share.

  • The most important thing is practice As with anything, the most important thing you can do is to practice. That’s why, if you have a little bit of savings that aren’t part of an emergency fund, it’s a good idea to put them in an investment account and play around with them. The worst-case scenario is you make a stupid decision and hit your stop loss, and then trade back to cash. Consider this paying for an education. You’re going to have to make and manage investments sooner or later; sooner is better than later.
  • Investing is mostly a psychological game Although from the outside, investing looks like numbers and math, once you put money on the line it becomes almost entirely psychological. Here’s a few dilemmas you’ll encounter:
    • You see a stock, which metrics show is priced too highly, continue to climb steadily as people jump on board. Can you withstand the temptation to join in, even as people you know are getting rich?
    • The market plunged 4% today as people panicked. Some of your holdings are now down 8-9%. Can you keep from selling?
    • A stock you own has gone up 12% and it still seems reasonably priced (earnings have gone up as well). Can you resist taking your gains?
    • An ETF you bought recently plunged and hit your 15% loss limit. Even though you’re certain it will turn around, do you have the balls to sell?

    While numbers have their place, in many cases your overall performance will be defined by whether you can resist your lizard brain and listen to reason.

  • Invest with a goal and theme When I started investing, I had no theme. I heard that index investing was good, so I’d put a bunch of money in indices. And then I’d think that emerging markets were great, and I’d put a bunch of money there. I ended up with a lot of random holdings.

    Now, my investment goal is to earn more investment income than my monthly expenses. That includes bond coupons, stock/ETF dividends, etc. I know that my primary investment vehicle is dividend-growth stocks with 4-5% yield. I diversify with municipal bonds and treasuries, which also provide me income. I have some REITs and MLPs to boost yields. And I speculate a little bit with emerging markets ETFs. If I feel the market is getting bearish, I know what I’ll liquidate first (emerging markets), and also where I will search for opportunities.

  • You don’t need to read every book out there While there’s a near-infinite amount of investment books, a few books will get you started – there’s little return on reading 50 books before investing a cent. Good starters include classics such as A Random Walk Down Wall Street as well as The Intelligent Asset Allocator and so on. Read these, and you should be comfortable enough to get started.
  • Ignore daily price movement Go to Google Finance. The headline every day will read something like “Investors nervous about Greek Bailout” or “Wall Street lifted by Employment Numbers.” Guess what? That’s bullshit. 90% of the time, the market’s movement during a day doesn’t matter. The major media outlets, such as CNBC, won’t say it, because their whole business model is getting you to read their ‘up to the second information,’ but in most cases there’s no story to the market’s movement. It’s just random. Watch trends. Read up on news on your holdings, as well as securities you’ve identified as targets. But ignore stories people have made up about why the market is up or down 2%.