Sunday, August 17, 2008

Media And The Market Often Disconnected

I recently read an article by Dick Davis of the famed Dick Davis Digest titled, The Stock Market and the Media: Turn It on, But Tune It Out, that essentially highlights the fact the news media tends to be out of sync with future market action. Dick Davis is also the author of The Dick Davis Dividend. My take on his media article is the news media tends to focus on short term news information that sometimes tends to impact a stock's price. However, the long run direction of a stock's price is going to be impacted by long term trends impacting a company's business.

Dick Davis makes the point that:
Part of the problem is that, while some news does involve sharp and sudden stock reactions (only when it involves surprise), most of the never-ending flood of daily news is routine, insignificant and meaningless in terms of durable impact. It is important to PR firms, journalists, TV reporters and traders because it gives them a means of making a living. But to the long-term investor, it is little more than filler and noise.

...The truth is that, except in cases of obvious causality (when the news triggers an immediate and decisive reaction), we never know for sure why the market or a stock does what it does. Since a stock is bought and sold by thousands of individuals every day, it’s reasonable to assume there is more than one reason causing its behavior. In fact, there can be a myriad of reasons, some knowable, others not knowable. Buy and sell decisions are often motivated by a host of non-news-related, silent triggers that are rarely cited by the media.
The article notes six points that should be alluded to in news reports trying to explain the gyrations in the market:
1. The stock market itself is the all-powerful final arbiter. The day, hour, or minute it feels the rubber band has been stretched too far, it’ll do something about it, not before.

2. Human emotions, responding to the markets’ gyrations and triggered by fear and greed, likely play a key role.

3. Worries over a wide range of overlapping factors, both fundamental and technical, may or may not be additional influences. (Future market historians may well cite long-standing housing and credit worries as major factors in shaping the market’s trend. The significance of their role on the particular day of July 26, however, is unknowable.)

4. A market that acts randomly and irrationally cannot be explained logically.

5. Except in cases of surprise, most news is irrelevant in explaining the market’s action on a particular day. The stock market leads; the news follows.

6. The answer to the question, “Why today?,” is: “I don’t know—nor does anyone else.” The markets are complex and perverse. They defy definitive answers.
As an investor then, remember the news media is most often reporting on events that are of a short term consequence and have occurred in the past. Certainly this is not the case with all news reports, but I do believe it is the case with most. An example of this might be the cover article I read on oil that appeared in a BusinessWeek magazine a few months ago. The word "Oil" took up a large portion of the cover. Well, the bubble in oil seems to be popping.


The Stock Market and the Media: Turn It on, But Tune It Out
The American Association of Individual Investors
By: Dick Davis

This article was written by Disciplined Approach to Investing. You can email questions or comments to me by clicking here.


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