Be Proactive Instead of Reactive

We’re probably the only firm in the investment business who doesn’t have CNBC blaring in the background of the office.  We do have computers that can stream live TV but usually it’s to keep up with shows like The Office or World Cup (when they were showing it).  But we rarely tune into CNBC.  One reason is that I’m afraid of what I’ll do if I’m inundated with news all day.

I can see why people get caught up in short-term thinking watching CNBC.  One day feels like a lifetime given all the stuff that is reported each day.  This company’s earnings.  That company’s lawsuit. This new CEO.  That new product.  This hot new IPO.  That new technology.

And the opinions.  Everybody has an opinion on Wall Street, and CNBC makes sure you know everyone’s opinion.  Every minute of every day. 

It’s enough to drive you nuts.  Or at the very least, enough to make you do things in your investment program that you shouldn’t. 

If you asked the reporters at CNBC if what they’re reporting has lasting significance, I doubt they could say yes, and mean it.  So why do they report it?  Because they have a bunch of time to fill.  So they tell you what the producer price index did this month.  They tell you that payrolls declined 2% for the month.  They tell you of analysts downgrades, upgrades, and opinions.  Does any of this truly matter in the long run?  No.

Reacting to news on CNBC or any other financial media outlet is a loser’s game simply because this information may be “news” only to you.  You are not first on the information food chain.  If you read about something in the Wall Street Journal, you’re not alone.  Millions of other investors also read it, and millions more investors knew about it 24 hours earlier when the “news” actually took place.  It’s silly to think that what you hear on CNBC gives you a leg up in the information game.  Chances are, the stock already is reflecting the information by the time you decide to move on the “news.”

Don’t get chased out of stocks (or any financial instrument) simply because of a single news event that the financial media trumpets as being important.  Chances are, that news event is some trivial piece of data whose primary value is to fill air time.

The Inability to Predict Future Events

I was listening to an Audio Book called “The Black Swan” by Nassim Taleb this weekend and found the topic of predicting future events through historical events fascinating. 

Summarizing his main point on the topic as it relates to trading and investing is we believe that we can somehow predict future price outcomes by simply studying the past price movements.  It’s as if you were to buy 10 previous copies of the New York Post and with what you’ve learned from those articles, you’ll somehow predict the next few days’ news stories. 

We often get trapped into that thinking when it comes to our investments.  We see a certain high performing mutual fund that is offered in our 401k plan for example and we believe it will continue forever, only to trap us several years later when we realize we got in at the absolute peak price. 

This doesn’t mean we should disregard price charts, and other historical evidence altogether.  But, instead we should consider the probable outcome and include those unpredictable events within our portfolio.  

Avoid Forecasting - Learn to Recognize What's Happening Around You

Many people will try to see what they want to see and not necessarily what is actually going on.  Don't fall into that trap.  Be aware of indicators that suggest things may change, but do not get into forecasting.  The greatest investor of them all, Warren Buffett, has saying, "Forecasting tells you how much about the forecaster and nothing about the future!"

If the year 2008 told you anything, it should have told you that there is no such thing as an ever-growing economy.  If you believed that real estate properties will continue to rise because "they're not making more Real Estate," then please read the book, Extraordinary Popular Delusions and the Madness of Crowds (Mackay, 1980), and you'll see that hype existed long before our current "economic recovery," all the previous economies before that and will continue to exist well into future economies!

Ultimately, company values will depend on their financial performance in the long term.  Sure, there are wild short-term swings and great opportunities in the immediate term.  Sure, there were some amazing opportunities during the early part of 2009 (bargain basement prices abound!).  CAM Trading participated in those crazy days too.  But, eventually when the market wakes up, guess what happens to those synthetic prices?  History repeats itself time and again, especially where the stock market is concerned.