Speaker 1: I'm Barry Ridholtz, and on today's edition of At the Money,
Speaker 1: we're gonna discuss noise. Not just any noise, but the
Speaker 1: kind of noise that distracts investors. Earnings reports, news releases, upgrades, downgrades,
Speaker 1: economic data, geopolitics. They can be a confusing swirl for
Speaker 1: long term investors. How best to manage this fire hose
Speaker 1: of distractions. To help us unpack this and what it
Speaker 1: means for your portfolio, Let's bring in Larry Swedrow. He's
Speaker 1: head of financial and economic research at Buckingham Strategic Wealth.
Speaker 1: The firm manages or advises on over seventy billion dollars
Speaker 1: in client assets, and Larry has written or co written
Speaker 1: twenty books on investing. So let's start with our first
Speaker 1: Masters and Business interview we did years ago. You kind
Speaker 1: of stunned me by saying all of those news items
Speaker 1: are meaningless to long term investors.
Speaker 2: Explain, Barry, the problem that investors failed to understand is
Speaker 2: that the market knows everything you know, and the minute
Speaker 2: news comes out, the market instantly adjusts to that new information,
Speaker 2: which is what is moving prices, and by the time
Speaker 2: you react, it's already too late.
Speaker 3: And you should therefore ignore the noise.
Speaker 2: A great example of that is let's say a company
Speaker 2: is trading at sixty. This is a real example, and
Speaker 2: the earning announcement comes out after the market stock earnings
Speaker 2: were up one hundred percent. Now a lot of invest
Speaker 2: as would jump on that and say, gee, you what
Speaker 2: a great earnings number.
Speaker 3: We would own it.
Speaker 2: First price. The next price it traded at was like forty.
Speaker 2: Why because the market was expecting more than one hundred
Speaker 2: percent earnings, uh, and therefore it was disappointed. So the
Speaker 2: news itself is not relevant. News doesn't matter if it's
Speaker 2: good or bad. That's what investors make a mistake. All
Speaker 2: that matters if it's better or worse than the market
Speaker 2: already expected. And if that's true, then the market moves
Speaker 2: and now it adjusts, and again it's too late to act.
Speaker 2: So you just want to have a plan that's well
Speaker 2: thought out and sit there. Give you one other great
Speaker 2: example from my book General Motives and the Great Recession.
Speaker 2: Announced earnings were down twenty percent, and investors would think
Speaker 2: the stock should crash. Clearly, down twenty percent is a
Speaker 2: bad earnings number.
Speaker 3: In fact, the stock.
Speaker 2: Row because the news, while bad, was not as bad
Speaker 2: as expected, the price went up and adjusted to that
Speaker 2: new information immediately. Research has sewn something like ninety five
Speaker 2: percent of the move occurs literally in the first price,
Speaker 2: which today takes seconds.
Speaker 3: It's that long, and then the move is over.
Speaker 2: You can see that anytime we get an economic news,
Speaker 2: the ten year bond moves let's say five or six
Speaker 2: basis points, and then it tends to sit there the rest.
Speaker 3: Of the day.
Speaker 1: So let's talk about economic news, because it's not just
Speaker 1: the biggest ones like GDP every month which comes GDP
Speaker 1: comes out quarterly, but every month we get non farm payroll.
Speaker 1: And you flick on the TV on the first Friday
Speaker 1: of the month, and in the corner of your screen
Speaker 1: is a countdown, literally counting down the seconds till non
Speaker 1: farm payroll releases. It looks like it's a big deal.
Speaker 1: Everybody runs around and jumps up and down. I get
Speaker 1: the feeling you don't think non farm payroll or GDP
Speaker 1: is all that important to what happens in equities.
Speaker 3: You know, I wouldn't put it that way.
Speaker 2: It clearly is important, but that doesn't mean you should
Speaker 2: do anything about it, for the reasons we have discussed clearly.
Speaker 2: You know, whether the economy is doing better or worse
Speaker 2: than expected, is going to affect stock prices. The problem
Speaker 2: is all of the evidence, there's not a single study
Speaker 2: I'm aware of that says anything different that.
Speaker 3: The odds of your being able.
Speaker 2: To exploit this news by trading quickly on it. That
Speaker 2: means market timing. I mean, you know, there's very, very
Speaker 2: very few people who have been successful doing it. And
Speaker 2: one of the great ironies is people idolize Buffett and
Speaker 2: Peter Lynch, and both of them told you never to
Speaker 2: try to time the market, and yet people not only
Speaker 2: ignore their advice while idolizing, they tend to do the
Speaker 2: very opposite. That's why I wrote the book Think Act
Speaker 2: and invest like buffet.
Speaker 3: Investing is simple, just act like buffet. But that's very.
Speaker 2: Odd for the emotional reasons we've talked about. And the
Speaker 2: media plays on these fears and emotions. They know that
Speaker 2: people will react. They want you to tune in. That's
Speaker 2: how they make money selling those commercials while you're watching.
Speaker 3: But that's not in your interest.
Speaker 1: So there's an endless array of other corporate news, dividends, mergers,
Speaker 1: bond issue in, stock splits, acquisitions. What should an investor
Speaker 1: do in response to all of this breaking news on
Speaker 1: the corporate side.
Speaker 3: Literally nothing.
Speaker 2: If you have a well thought out plan to make
Speaker 2: sure you've anticipated, you know, bear markets, recessions, black swans
Speaker 2: that could hit the market, making sure you don't take
Speaker 2: any more risk than you have the ability, the willingness,
Speaker 2: and need to take, because if you do, when those
Speaker 2: black swan or negative events occur, you will likely to
Speaker 2: have problems driven by fear, and you will panic and
Speaker 2: sell because your stomach will take over. And even if not,
Speaker 2: you're going to get so upset, you're going to lose
Speaker 2: sleep worrying, and life's too short not to enjoy it.
Speaker 2: So you're better off making sure your plan doesn't exceed
Speaker 2: your risk tolerance or your need to take risk, so
Speaker 2: you don't subject yourself to those.
Speaker 3: Emotional issues.
Speaker 2: And lastly, if you can't do it yourself, that's the
Speaker 2: biggest role of a financial advisor. Number one, get the
Speaker 2: plan right in the first place, and then play Clint
Speaker 2: Eastwood his cop and say, you know, reminder, hold that
Speaker 2: six gun to the guy's head and say here, you
Speaker 2: sign that investment policy statement, go ahead and make my day.
Speaker 1: So lately we've seen a big uptick in activist investors.
Speaker 1: What happens if you hold Disney or Apple or Tesla
Speaker 1: as part of your portfolio. What should you do when
Speaker 1: these activists come out of the out of the woodwork
Speaker 1: and start agitating for change.
Speaker 2: I would suggest nothing, because the markets already incorporated that
Speaker 2: information into prices. The smart guys like Buffett and Goldman
Speaker 2: and Goldman Sachs, and you know every one of these
Speaker 2: actively managed funds, they're already reacting to that news and
Speaker 2: then their collective wisdom. The stock price is at that
Speaker 2: moment the best estimate of the future price.
Speaker 3: And again, if there was evidence that.
Speaker 2: People could exploit it, where do we see it in
Speaker 2: persistent outperformance? Over ninety percent of the active managers underperform
Speaker 2: over the long term in every single asset class, and
Speaker 2: that's even before taxes.
Speaker 1: Well recording this, it's twenty twenty four. It's a big
Speaker 1: election year in the United States. We have two candidates,
Speaker 1: both of whom either are or have been president previously.
Speaker 1: People are forecasting a lot of turmoil around this election,
Speaker 1: maybe even some civil or unrest. How should we adjust
Speaker 1: our portfolios for the big presidential election in November twenty
Speaker 1: twenty four?
Speaker 2: Again, I would urge that everything that you just told
Speaker 2: me is known by the market. That uncertainty is built
Speaker 2: into the market. Unless you've got a clear crystal ball
Speaker 2: about what's going to happen, and nobody does, then the
Speaker 2: best thing you can do is diversify. And the second
Speaker 2: thing is you want to make sure you do not
Speaker 2: let your political biases influence your investment decisions. There's actually
Speaker 2: good academic research that shows this. When the party you
Speaker 2: favor is in power, you get higher returns than when
Speaker 2: the party you favor.
Speaker 3: Is out of power.
Speaker 2: The reason is, for example, in two thousand, when we
Speaker 2: got hit by nine to one one, the events had
Speaker 2: a big bear market. Well, if you were a publican,
Speaker 2: you were more likely to think that the Republicans would
Speaker 2: figure out what actions we would need to get out
Speaker 2: of it, and then therefore you were much less likely
Speaker 2: to panic and sell, and Republican investors outperformed Democratic investors
Speaker 2: during the Bush administration and then the Trump administration. However,
Speaker 2: the reverse was true when Obama was president. We got
Speaker 2: hit with theaight financial crisis, and Democratic investors would have
Speaker 2: had more confidence and his ability to maneuver out of it.
Speaker 2: They were more likely to stay the course uh, and
Speaker 2: therefore they were able to gain the rebound in the market,
Speaker 2: and the same thing is now true under Biden. So
Speaker 2: make sure you do not allow your political biases to
Speaker 2: impact your investments. If you're concerned about geopolitical risk, the
Speaker 2: best thing to do is build a highly diversified plan
Speaker 2: so that can protect you, like buy insurance against having
Speaker 2: all your assets in the wrong basket.
Speaker 1: So earnings are key drivers of stock prices. How should
Speaker 1: investors respond to the just torrents of quartally earnings that
Speaker 1: come out every three months.
Speaker 2: There is some evidence here to support the idea that
Speaker 2: when there are positive or negative earning surprises is called
Speaker 2: the peed factor post.
Speaker 3: Earnings announcement drift.
Speaker 2: That because of momentum in stocks, which does exist, if
Speaker 2: you get a surprise on the upside, investors are slow
Speaker 2: to react a little bit and the prices will tend
Speaker 2: to rise to some degree. Now, everyone who's an academic
Speaker 2: and practitioner with an MBA or PhD in finance and math,
Speaker 2: they already know this, So that evidence is shrinking. So
Speaker 2: my advice is you're probably best off just to ignore
Speaker 2: it and don't trade. But there is some evidence of that.
Speaker 2: So if you're thinking you're going to get out of
Speaker 2: the stock anyway, and you had a negative earning announcement
Speaker 2: that might trod you to do it, and maybe you'll
Speaker 2: hold on a little longer. If you think, Okay, I've
Speaker 2: got to rebalance and sell, maybe you do hang on
Speaker 2: a little longer.
Speaker 1: So to wrap up, investors who have a long term
Speaker 1: time horizon should expect distractions along the way. But the
Speaker 1: data shows, whether it's economic data, geopolitics, quarterly earnings, analyst
Speaker 1: upgrades and downgrades, corporate news, none of us have any
Speaker 1: extra insight as to how those events will unfold and
Speaker 1: how they'll impact stock prices in the future. Your best
Speaker 1: bet stick with stocks for the long haul and ignore
Speaker 1: the noise. Better rerit halts. And this is Bloomberg's at
Speaker 1: the Money.
Speaker 2: Rama.
Speaker 1: Wow wow Wow, Ramma Fel