WEBVTT - At the Money: Lose the Noise

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<v Speaker 1>I'm Barry Ridholtz, and on today's edition of At the Money,

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<v Speaker 1>we're gonna discuss noise. Not just any noise, but the

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<v Speaker 1>kind of noise that distracts investors. Earnings reports, news releases, upgrades, downgrades,

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<v Speaker 1>economic data, geopolitics. They can be a confusing swirl for

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<v Speaker 1>long term investors. How best to manage this fire hose

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<v Speaker 1>of distractions. To help us unpack this and what it

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<v Speaker 1>means for your portfolio, Let's bring in Larry Squedrow. He's

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<v Speaker 1>head of financial and economic research at Buckingham Strategic Wealth.

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<v Speaker 1>The firm manages or advises on over seventy billion dollars

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<v Speaker 1>in client assets, and Larry has written or co written

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<v Speaker 1>twenty books on investing. So let's start with our first

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<v Speaker 1>Masters and Business interview we did years ago. You kind

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<v Speaker 1>of stunned me by saying all of those news items

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<v Speaker 1>are meaningless to long term investors.

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<v Speaker 2>Explain, Barry, the problem that investors failed to understand is

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<v Speaker 2>that the market knows everything you know, and the minute

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<v Speaker 2>news comes out, the market instantly adjusts to that new information,

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<v Speaker 2>which is what is moving prices, and by the time

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<v Speaker 2>you react, it's already too late.

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<v Speaker 3>And you should therefore ignore the noise.

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<v Speaker 2>A great example of that is let's say a company is.

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<v Speaker 3>Trading at sixty. This is a real example, and.

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<v Speaker 2>The earning announcement comes out after the market stock earnings

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<v Speaker 2>were up one hundred percent. Now a lot of as

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<v Speaker 2>would jump on that and say, gee, you what a

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<v Speaker 2>great earnings number.

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<v Speaker 3>We would own it.

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<v Speaker 2>First price. The next price it traded at was like forty.

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<v Speaker 2>Why because the market was expecting more than one hundred

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<v Speaker 2>percent earnings, uh, and therefore it was disappointed. So the

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<v Speaker 2>news itself is not relevant. News doesn't matter if it's

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<v Speaker 2>good or bad. That's what investors make a mistake. All

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<v Speaker 2>that matters if it's better or worse than the market

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<v Speaker 2>already expected. And if that's true, then the market moves

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<v Speaker 2>and now it adjusts, and again it's too late to act.

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<v Speaker 2>So you just want to have a plan that's well

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<v Speaker 2>thought out and sit there. Give you one other great

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<v Speaker 2>example from my book General Motives and the Great Recession.

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<v Speaker 2>Announced earnings were down twenty percent, and investors would think

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<v Speaker 2>the stock should crash. Clearly, down twenty percent is a

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<v Speaker 2>bad earnings number. In fact, the stock row because the news,

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<v Speaker 2>while bad, was not as bad as expected.

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<v Speaker 3>The price went up.

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<v Speaker 2>And adjusted to that new information immediately. Research has sewn

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<v Speaker 2>something like ninety five percent of the move occurs literally

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<v Speaker 2>in the first price, which today takes seconds.

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<v Speaker 3>It's that long, and then the move is over.

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<v Speaker 2>You can see that anytime we get an economic news,

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<v Speaker 2>the ten year bond moves let's say five or six

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<v Speaker 2>basis points, and then it tends to sit there the

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<v Speaker 2>rest of the day.

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<v Speaker 1>So let's talk about economic news, because it's not just

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<v Speaker 1>the biggest ones like GDP every month which comes GDP

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<v Speaker 1>comes out quarterly, but every month we get non farm payroll.

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<v Speaker 1>And you flick on the TV on the first Friday

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<v Speaker 1>of the month, and in the corner of your screen

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<v Speaker 1>is a countdown, literally counting down the seconds till non

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<v Speaker 1>farm payroll releases. It looks like it's a big deal.

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<v Speaker 1>Everybody runs around and jumps up and down. I get

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<v Speaker 1>the feeling you don't think non farm payroll or GDP

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<v Speaker 1>is all that important to what happens in equities.

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<v Speaker 3>You know, I wouldn't put it that way.

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<v Speaker 2>It clearly is important, but that doesn't mean you should

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<v Speaker 2>do anything about it, for the reasons we have discussed clearly.

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<v Speaker 2>You know, whether the economy is doing better or worse

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<v Speaker 2>than expected, is going to affect stock prices. The problem

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<v Speaker 2>is all of the evidence, there's not a single study

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<v Speaker 2>I'm aware of that says anything different that.

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<v Speaker 3>The odds of your being able.

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<v Speaker 2>To exploit this news by trading quickly on it.

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<v Speaker 3>That means market timing.

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<v Speaker 2>I mean, you know, there's very, very very few people

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<v Speaker 2>who have been successful doing it. And one of the

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<v Speaker 2>great ironies is people idolize Buffett and Peter Lynch, and

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<v Speaker 2>both of them told you never to try to time

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<v Speaker 2>the market, and yet people not only ignore their advice

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<v Speaker 2>while idolizing, they tend to do the very opposite. That's

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<v Speaker 2>why I wrote the book Think Act and invest like buffet.

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<v Speaker 2>Investing is simple, just act like buffet. But that's very

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<v Speaker 2>odd for the emotional reasons we've talked about. And the

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<v Speaker 2>media plays on these fears and emotions. They know that

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<v Speaker 2>people will react. They want you to tune in. That's

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<v Speaker 2>how they make money selling those commercials while you're watching.

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<v Speaker 3>But that's not in your interest.

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<v Speaker 1>So there's an endless array of other corporate news, dividends, mergers,

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<v Speaker 1>bond issue in, stock splits, acquisitions. What should an investor

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<v Speaker 1>do in response to all of this breaking news on

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<v Speaker 1>the corporate.

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<v Speaker 3>Side, literally nothing.

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<v Speaker 2>If you have a well thought out plan to make

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<v Speaker 2>sure you've anticipated, you know, bear markets, recessions, black swans

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<v Speaker 2>that could hit the market, making sure you don't take

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<v Speaker 2>any more risk than you have the ability, the willing,

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<v Speaker 2>and need to take, because if you do, when those

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<v Speaker 2>black swan or negative events occur, you will likely to

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<v Speaker 2>have problems driven by fear, and you will.

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<v Speaker 3>Panic and sell because your stomach will take over. And

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<v Speaker 3>even if.

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<v Speaker 2>Not, you're going to get so upset, you're going to

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<v Speaker 2>lose sleep worrying, and life's too short not to enjoy it.

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<v Speaker 3>So you're better off making sure your plan.

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<v Speaker 2>Doesn't exceed your risk tolerance or your need to take risk,

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<v Speaker 2>so you don't subject yourself to those.

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<v Speaker 3>Emotional issues.

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<v Speaker 2>And lastly, if you can't do it yourself, that's the

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<v Speaker 2>biggest role of a financial advisor. Number one, get the

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<v Speaker 2>plan right in the first place, and then play Clint

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<v Speaker 2>Eastwood his cop and say, you know, reminder, hold that

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<v Speaker 2>six gun to the guy's head and say here, you

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<v Speaker 2>sign that investment policy statement, go ahead and make my day.

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<v Speaker 1>So lately we've seen a big uptick in activist investors,

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<v Speaker 1>what happens if you hold Disney or Apple or Tesla

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<v Speaker 1>as part of your portfolio. What should you do when

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<v Speaker 1>these activists come out of the out of the woodwork

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<v Speaker 1>and start agitating for change.

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<v Speaker 2>I would suggest nothing, because the markets already incorporated that

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<v Speaker 2>information into prices. The smart guys like Buffett and gold

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<v Speaker 2>and Goldman, Sachs, and you know every one of these

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<v Speaker 2>actively managed funds, they're already reacting to that news, and

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<v Speaker 2>then they're collective wisdom. The stock price is at that

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<v Speaker 2>moment the best estimate of the future price.

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<v Speaker 3>And again, if there was evidence that.

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<v Speaker 2>People could exploit it, where do we see it in

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<v Speaker 2>persistent outperformance? Over ninety percent of the active managers underperform

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<v Speaker 2>over the long term in every single asset class, and

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<v Speaker 2>that's even before taxes.

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<v Speaker 1>Well recording this, it's twenty twenty four. It's a big

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<v Speaker 1>election year in the United States. We have two candidates,

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<v Speaker 1>both of whom either are or have been president previously.

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<v Speaker 1>People are forecasting a lot of turmoil around this election,

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<v Speaker 1>maybe even some civil unrest. How should we adjust our

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<v Speaker 1>portfolios for the big presidential election in November twenty twenty four?

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<v Speaker 2>Again, I would urge that everything that you just told

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<v Speaker 2>me is known by the market. That uncertainty is built

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<v Speaker 2>into the market. Unless you've got a clear crystal ball

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<v Speaker 2>about what's going to happen, and nobody does, then the

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<v Speaker 2>best thing you can do is diversify. And the second

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<v Speaker 2>thing is you want to make sure you do not

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<v Speaker 2>let your political biases influence your investment decisions. There's actually

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<v Speaker 2>good academic research that shows this.

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<v Speaker 3>When the party you.

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<v Speaker 2>Favor is in power, you get higher returns than when

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<v Speaker 2>the party you favor.

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<v Speaker 3>Is out of power.

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<v Speaker 2>The reason is, for example, in two thousand, when we

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<v Speaker 2>got hit by nine to one one, the events had

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<v Speaker 2>a big bear market. Well, if you were a publican,

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<v Speaker 2>you were more likely to think that the Republicans would

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<v Speaker 2>figure out what actions we would need to get out

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<v Speaker 2>of it, and then therefore you were much less likely

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<v Speaker 2>to panic and sell, and Republican investors outperformed Democratic investors

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<v Speaker 2>during the Bush administration and then the Trump administration. However,

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<v Speaker 2>the reverse was true when Obama was president. We got

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<v Speaker 2>hit with theaight financial crisis, and Democratic investors would have

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<v Speaker 2>had more confidence and his ability to maneuver out of it.

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<v Speaker 3>They were more likely to stay the course. UH and

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<v Speaker 3>therefore they.

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<v Speaker 2>Were able to gain the rebound in the market, and

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<v Speaker 2>the same thing is.

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<v Speaker 3>Now true under Biden.

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<v Speaker 2>So make sure you do not allow your political biases

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<v Speaker 2>to impact your investments. If you're concerned about geopolitical risk,

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<v Speaker 2>the best thing to do is build a highly diversified

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<v Speaker 2>plan so that can protect you, like buy insurance against

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<v Speaker 2>having all your assets in the wrong basket.

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<v Speaker 1>So earnings are key drivers of stock prices. How should

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<v Speaker 1>investors respond to the just torrents of quartally earnings that

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<v Speaker 1>come out every three months.

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<v Speaker 2>There is some evidence here to support the idea that

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<v Speaker 2>when there are positive or negative earning surprises is called

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<v Speaker 2>the peed factor post earnings announcement drift.

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<v Speaker 3>That because of momentum.

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<v Speaker 2>In stocks, which does exist, if you get a surprise

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<v Speaker 2>on the upside, investors are slow to react a little

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<v Speaker 2>bit and the prices will tend to rise to some degree. Now,

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<v Speaker 2>everyone who's an academic and practitioner with an MBA or

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<v Speaker 2>PhD in finance and math, they already know this, So

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<v Speaker 2>that evidence is shrinking. So my advice is you're probably

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<v Speaker 2>best off just to ignore it, don't trade. But there

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<v Speaker 2>is some evidence of that. So if you're thinking you're

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<v Speaker 2>going to get out of a stock anyway, and you

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<v Speaker 2>had a negative earning announcement, that might trod you to

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<v Speaker 2>do it, and maybe you'll hold on a little longer.

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<v Speaker 2>If you think, Okay, I've got to rebalance and sell,

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<v Speaker 2>maybe you do hang on a little longer.

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<v Speaker 1>So to wrap up, investors who have a long term

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<v Speaker 1>time horizon should expect distractions along the way. But the

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<v Speaker 1>data shows, whether it's economic data, geopolitics, quarterly earnings, analyst

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<v Speaker 1>upgrades and downgrades, corporate news, none of us have any

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<v Speaker 1>extra insight as to how those events will unfold and

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<v Speaker 1>how they'll impact stock prices in the future. Your best

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<v Speaker 1>bet stick with stocks for the long haul and ignore

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<v Speaker 1>the noise. Betr Rid halts And this is Bloomberg's at

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<v Speaker 1>the Money w