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

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Speaker 1: we're gonna discuss noise. Not just any noise, but the

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

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Speaker 1: economic data, geopolitics. They can be a confusing swirl for

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Speaker 1: long term investors. How best to manage this fire hose

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Speaker 1: of distractions. To help us unpack this and what it

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Speaker 1: means for your portfolio, Let's bring in Larry Swedrow. He's

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Speaker 1: head of financial and economic research at Buckingham Strategic Wealth.

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Speaker 1: The firm manages or advises on over seventy billion dollars

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Speaker 1: in client assets, and Larry has written or co written

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Speaker 1: twenty books on investing. So let's start with our first

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Speaker 1: Masters and Business interview we did years ago. You kind

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Speaker 1: of stunned me by saying all of those news items

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Speaker 1: are meaningless to long term investors.

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Speaker 2: Explain, Barry, the problem that investors failed to understand is

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Speaker 2: that the market knows everything you know, and the minute

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Speaker 2: news comes out, the market instantly adjusts to that new information,

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Speaker 2: which is what is moving prices, and by the time

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Speaker 2: you react, it's already too late.

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Speaker 3: And you should therefore ignore the noise.

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Speaker 2: A great example of that is let's say a company

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Speaker 2: is trading at sixty. This is a real example, and

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Speaker 2: the earning announcement comes out after the market stock earnings

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Speaker 2: were up one hundred percent. Now a lot of invest

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Speaker 2: as would jump on that and say, gee, you what

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Speaker 2: a great earnings number.

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Speaker 3: We would own it.

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Speaker 2: First price. The next price it traded at was like forty.

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Speaker 2: Why because the market was expecting more than one hundred

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Speaker 2: percent earnings, uh, and therefore it was disappointed. So the

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

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Speaker 2: good or bad. That's what investors make a mistake. All

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Speaker 2: that matters if it's better or worse than the market

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

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Speaker 2: and now it adjusts, and again it's too late to act.

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Speaker 2: So you just want to have a plan that's well

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Speaker 2: thought out and sit there. Give you one other great

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Speaker 2: example from my book General Motives and the Great Recession.

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Speaker 2: Announced earnings were down twenty percent, and investors would think

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Speaker 2: the stock should crash. Clearly, down twenty percent is a

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Speaker 2: bad earnings number.

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Speaker 3: In fact, the stock.

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Speaker 2: Row because the news, while bad, was not as bad

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Speaker 2: as expected, the price went up and adjusted to that

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Speaker 2: new information immediately. Research has sewn something like ninety five

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Speaker 2: percent of the move occurs literally in the first price,

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Speaker 2: which today takes seconds.

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Speaker 3: It's that long, and then the move is over.

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Speaker 2: You can see that anytime we get an economic news,

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Speaker 2: the ten year bond moves let's say five or six

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Speaker 2: basis points, and then it tends to sit there the rest.

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Speaker 3: Of the day.

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Speaker 1: So let's talk about economic news, because it's not just

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Speaker 1: the biggest ones like GDP every month which comes GDP

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Speaker 1: comes out quarterly, but every month we get non farm payroll.

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Speaker 1: And you flick on the TV on the first Friday

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Speaker 1: of the month, and in the corner of your screen

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Speaker 1: is a countdown, literally counting down the seconds till non

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Speaker 1: farm payroll releases. It looks like it's a big deal.

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Speaker 1: Everybody runs around and jumps up and down. I get

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Speaker 1: the feeling you don't think non farm payroll or GDP

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Speaker 1: is all that important to what happens in equities.

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Speaker 3: You know, I wouldn't put it that way.

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Speaker 2: It clearly is important, but that doesn't mean you should

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Speaker 2: do anything about it, for the reasons we have discussed clearly.

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Speaker 2: You know, whether the economy is doing better or worse

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Speaker 2: than expected, is going to affect stock prices. The problem

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Speaker 2: is all of the evidence, there's not a single study

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Speaker 2: I'm aware of that says anything different that.

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Speaker 3: The odds of your being able.

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Speaker 2: To exploit this news by trading quickly on it. That

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Speaker 2: means market timing. I mean, you know, there's very, very

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Speaker 2: very few people who have been successful doing it. And

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Speaker 2: one of the great ironies is people idolize Buffett and

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Speaker 2: Peter Lynch, and both of them told you never to

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Speaker 2: try to time the market, and yet people not only

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Speaker 2: ignore their advice while idolizing, they tend to do the

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Speaker 2: very opposite. That's why I wrote the book Think Act

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Speaker 2: and invest like buffet.

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Speaker 3: Investing is simple, just act like buffet. But that's very.

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Speaker 2: Odd for the emotional reasons we've talked about. And the

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Speaker 2: media plays on these fears and emotions. They know that

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Speaker 2: people will react. They want you to tune in. That's

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Speaker 2: how they make money selling those commercials while you're watching.

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Speaker 3: But that's not in your interest.

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

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Speaker 1: bond issue in, stock splits, acquisitions. What should an investor

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Speaker 1: do in response to all of this breaking news on

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Speaker 1: the corporate side.

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Speaker 3: Literally nothing.

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Speaker 2: If you have a well thought out plan to make

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Speaker 2: sure you've anticipated, you know, bear markets, recessions, black swans

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Speaker 2: that could hit the market, making sure you don't take

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Speaker 2: any more risk than you have the ability, the willingness,

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Speaker 2: and need to take, because if you do, when those

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Speaker 2: black swan or negative events occur, you will likely to

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Speaker 2: have problems driven by fear, and you will panic and

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Speaker 2: sell because your stomach will take over. And even if not,

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Speaker 2: you're going to get so upset, you're going to lose

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Speaker 2: sleep worrying, and life's too short not to enjoy it.

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Speaker 2: So you're better off making sure your plan doesn't exceed

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Speaker 2: your risk tolerance or your need to take risk, so

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Speaker 2: you don't subject yourself to those.

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Speaker 3: Emotional issues.

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

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Speaker 2: biggest role of a financial advisor. Number one, get the

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Speaker 2: plan right in the first place, and then play Clint

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Speaker 2: Eastwood his cop and say, you know, reminder, hold that

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Speaker 2: six gun to the guy's head and say here, you

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Speaker 2: sign that investment policy statement, go ahead and make my day.

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Speaker 1: So lately we've seen a big uptick in activist investors.

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Speaker 1: What happens if you hold Disney or Apple or Tesla

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Speaker 1: as part of your portfolio. What should you do when

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Speaker 1: these activists come out of the out of the woodwork

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Speaker 1: and start agitating for change.

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Speaker 2: I would suggest nothing, because the markets already incorporated that

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Speaker 2: information into prices. The smart guys like Buffett and Goldman

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Speaker 2: and Goldman Sachs, and you know every one of these

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Speaker 2: actively managed funds, they're already reacting to that news and

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Speaker 2: then their collective wisdom. The stock price is at that

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Speaker 2: moment the best estimate of the future price.

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Speaker 3: And again, if there was evidence that.

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Speaker 2: People could exploit it, where do we see it in

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Speaker 2: persistent outperformance? Over ninety percent of the active managers underperform

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Speaker 2: over the long term in every single asset class, and

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Speaker 2: that's even before taxes.

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Speaker 1: Well recording this, it's twenty twenty four. It's a big

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Speaker 1: election year in the United States. We have two candidates,

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Speaker 1: both of whom either are or have been president previously.

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Speaker 1: People are forecasting a lot of turmoil around this election,

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Speaker 1: maybe even some civil or unrest. How should we adjust

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Speaker 1: our portfolios for the big presidential election in November twenty

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Speaker 1: twenty four?

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Speaker 2: Again, I would urge that everything that you just told

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Speaker 2: me is known by the market. That uncertainty is built

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Speaker 2: into the market. Unless you've got a clear crystal ball

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Speaker 2: about what's going to happen, and nobody does, then the

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Speaker 2: best thing you can do is diversify. And the second

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Speaker 2: thing is you want to make sure you do not

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Speaker 2: let your political biases influence your investment decisions. There's actually

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Speaker 2: good academic research that shows this. When the party you

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Speaker 2: favor is in power, you get higher returns than when

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Speaker 2: the party you favor.

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Speaker 3: Is out of power.

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Speaker 2: The reason is, for example, in two thousand, when we

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Speaker 2: got hit by nine to one one, the events had

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Speaker 2: a big bear market. Well, if you were a publican,

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Speaker 2: you were more likely to think that the Republicans would

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Speaker 2: figure out what actions we would need to get out

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Speaker 2: of it, and then therefore you were much less likely

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Speaker 2: to panic and sell, and Republican investors outperformed Democratic investors

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Speaker 2: during the Bush administration and then the Trump administration. However,

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Speaker 2: the reverse was true when Obama was president. We got

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Speaker 2: hit with theaight financial crisis, and Democratic investors would have

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Speaker 2: had more confidence and his ability to maneuver out of it.

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Speaker 2: They were more likely to stay the course uh, and

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Speaker 2: therefore they were able to gain the rebound in the market,

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Speaker 2: and the same thing is now true under Biden. So

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Speaker 2: make sure you do not allow your political biases to

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Speaker 2: impact your investments. If you're concerned about geopolitical risk, the

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Speaker 2: best thing to do is build a highly diversified plan

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Speaker 2: so that can protect you, like buy insurance against having

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Speaker 2: all your assets in the wrong basket.

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Speaker 1: So earnings are key drivers of stock prices. How should

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Speaker 1: investors respond to the just torrents of quartally earnings that

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Speaker 1: come out every three months.

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Speaker 2: There is some evidence here to support the idea that

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Speaker 2: when there are positive or negative earning surprises is called

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Speaker 2: the peed factor post.

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Speaker 3: Earnings announcement drift.

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Speaker 2: That because of momentum in stocks, which does exist, if

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Speaker 2: you get a surprise on the upside, investors are slow

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Speaker 2: to react a little bit and the prices will tend

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Speaker 2: to rise to some degree. Now, everyone who's an academic

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Speaker 2: and practitioner with an MBA or PhD in finance and math,

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Speaker 2: they already know this, So that evidence is shrinking. So

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Speaker 2: my advice is you're probably best off just to ignore

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Speaker 2: it and don't trade. But there is some evidence of that.

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Speaker 2: So if you're thinking you're going to get out of

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Speaker 2: the stock anyway, and you had a negative earning announcement

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Speaker 2: that might trod you to do it, and maybe you'll

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Speaker 2: hold on a little longer. If you think, Okay, I've

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Speaker 2: got to rebalance and sell, maybe you do hang on

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Speaker 2: a little longer.

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Speaker 1: So to wrap up, investors who have a long term

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Speaker 1: time horizon should expect distractions along the way. But the

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Speaker 1: data shows, whether it's economic data, geopolitics, quarterly earnings, analyst

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Speaker 1: upgrades and downgrades, corporate news, none of us have any

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Speaker 1: extra insight as to how those events will unfold and

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Speaker 1: how they'll impact stock prices in the future. Your best

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Speaker 1: bet stick with stocks for the long haul and ignore

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Speaker 1: the noise. Better rerit halts. And this is Bloomberg's at

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Speaker 1: the Money.

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Speaker 2: Rama.

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Speaker 1: Wow wow Wow, Ramma Fel