WEBVTT - At the Money: Lose the Noise

0:00:16.440 --> 0:00:19.960
<v Speaker 1>I'm Barry Ridholtz, and on today's edition of At the Money,

0:00:20.160 --> 0:00:24.360
<v Speaker 1>we're gonna discuss noise. Not just any noise, but the

0:00:24.480 --> 0:00:30.800
<v Speaker 1>kind of noise that distracts investors. Earnings reports, news releases, upgrades, downgrades,

0:00:31.160 --> 0:00:36.400
<v Speaker 1>economic data, geopolitics. They can be a confusing swirl for

0:00:36.520 --> 0:00:40.640
<v Speaker 1>long term investors. How best to manage this fire hose

0:00:40.680 --> 0:00:43.960
<v Speaker 1>of distractions. To help us unpack this and what it

0:00:44.000 --> 0:00:47.480
<v Speaker 1>means for your portfolio, Let's bring in Larry Swedrow. He's

0:00:47.560 --> 0:00:51.600
<v Speaker 1>head of financial and economic research at Buckingham Strategic Wealth.

0:00:51.960 --> 0:00:55.200
<v Speaker 1>The firm manages or advises on over seventy billion dollars

0:00:55.200 --> 0:00:58.800
<v Speaker 1>in client assets, and Larry has written or co written

0:00:59.360 --> 0:01:04.240
<v Speaker 1>twenty books on investing. So let's start with our first

0:01:04.280 --> 0:01:09.119
<v Speaker 1>Masters and Business interview we did years ago. You kind

0:01:09.120 --> 0:01:12.480
<v Speaker 1>of stunned me by saying all of those news items

0:01:12.840 --> 0:01:15.800
<v Speaker 1>are meaningless to long term investors.

0:01:16.080 --> 0:01:22.280
<v Speaker 2>Explain, Barry, the problem that investors failed to understand is

0:01:22.360 --> 0:01:27.240
<v Speaker 2>that the market knows everything you know, and the minute

0:01:27.240 --> 0:01:32.320
<v Speaker 2>news comes out, the market instantly adjusts to that new information,

0:01:32.480 --> 0:01:36.080
<v Speaker 2>which is what is moving prices, and by the time

0:01:36.200 --> 0:01:38.440
<v Speaker 2>you react, it's already too late.

0:01:38.920 --> 0:01:41.080
<v Speaker 3>And you should therefore ignore the noise.

0:01:41.840 --> 0:01:47.560
<v Speaker 2>A great example of that is let's say a company

0:01:47.680 --> 0:01:52.040
<v Speaker 2>is trading at sixty. This is a real example, and

0:01:52.080 --> 0:01:56.800
<v Speaker 2>the earning announcement comes out after the market stock earnings

0:01:56.800 --> 0:01:59.920
<v Speaker 2>were up one hundred percent. Now a lot of invest

0:02:00.160 --> 0:02:02.400
<v Speaker 2>as would jump on that and say, gee, you what

0:02:02.520 --> 0:02:03.760
<v Speaker 2>a great earnings number.

0:02:03.960 --> 0:02:04.640
<v Speaker 3>We would own it.

0:02:04.960 --> 0:02:10.440
<v Speaker 2>First price. The next price it traded at was like forty.

0:02:11.040 --> 0:02:14.919
<v Speaker 2>Why because the market was expecting more than one hundred

0:02:15.000 --> 0:02:18.839
<v Speaker 2>percent earnings, uh, and therefore it was disappointed. So the

0:02:18.840 --> 0:02:23.239
<v Speaker 2>news itself is not relevant. News doesn't matter if it's

0:02:23.280 --> 0:02:27.040
<v Speaker 2>good or bad. That's what investors make a mistake. All

0:02:27.120 --> 0:02:30.400
<v Speaker 2>that matters if it's better or worse than the market

0:02:30.480 --> 0:02:34.800
<v Speaker 2>already expected. And if that's true, then the market moves

0:02:35.320 --> 0:02:38.600
<v Speaker 2>and now it adjusts, and again it's too late to act.

0:02:39.320 --> 0:02:42.080
<v Speaker 2>So you just want to have a plan that's well

0:02:42.120 --> 0:02:44.720
<v Speaker 2>thought out and sit there. Give you one other great

0:02:44.800 --> 0:02:48.640
<v Speaker 2>example from my book General Motives and the Great Recession.

0:02:48.680 --> 0:02:53.000
<v Speaker 2>Announced earnings were down twenty percent, and investors would think

0:02:53.040 --> 0:02:56.840
<v Speaker 2>the stock should crash. Clearly, down twenty percent is a

0:02:56.880 --> 0:02:58.200
<v Speaker 2>bad earnings number.

0:02:58.400 --> 0:02:59.679
<v Speaker 3>In fact, the stock.

0:02:59.560 --> 0:03:03.520
<v Speaker 2>Row because the news, while bad, was not as bad

0:03:03.560 --> 0:03:06.960
<v Speaker 2>as expected, the price went up and adjusted to that

0:03:07.040 --> 0:03:12.080
<v Speaker 2>new information immediately. Research has sewn something like ninety five

0:03:12.160 --> 0:03:15.560
<v Speaker 2>percent of the move occurs literally in the first price,

0:03:15.840 --> 0:03:17.520
<v Speaker 2>which today takes seconds.

0:03:18.440 --> 0:03:20.919
<v Speaker 3>It's that long, and then the move is over.

0:03:21.040 --> 0:03:24.560
<v Speaker 2>You can see that anytime we get an economic news,

0:03:24.800 --> 0:03:27.880
<v Speaker 2>the ten year bond moves let's say five or six

0:03:27.919 --> 0:03:30.760
<v Speaker 2>basis points, and then it tends to sit there the rest.

0:03:30.560 --> 0:03:31.079
<v Speaker 3>Of the day.

0:03:31.160 --> 0:03:34.920
<v Speaker 1>So let's talk about economic news, because it's not just

0:03:35.080 --> 0:03:39.280
<v Speaker 1>the biggest ones like GDP every month which comes GDP

0:03:39.360 --> 0:03:42.760
<v Speaker 1>comes out quarterly, but every month we get non farm payroll.

0:03:43.240 --> 0:03:45.920
<v Speaker 1>And you flick on the TV on the first Friday

0:03:45.960 --> 0:03:48.480
<v Speaker 1>of the month, and in the corner of your screen

0:03:48.600 --> 0:03:52.040
<v Speaker 1>is a countdown, literally counting down the seconds till non

0:03:52.120 --> 0:03:55.200
<v Speaker 1>farm payroll releases. It looks like it's a big deal.

0:03:55.240 --> 0:03:58.119
<v Speaker 1>Everybody runs around and jumps up and down. I get

0:03:58.120 --> 0:04:01.000
<v Speaker 1>the feeling you don't think non farm payroll or GDP

0:04:01.760 --> 0:04:04.720
<v Speaker 1>is all that important to what happens in equities.

0:04:05.240 --> 0:04:07.000
<v Speaker 3>You know, I wouldn't put it that way.

0:04:07.080 --> 0:04:09.800
<v Speaker 2>It clearly is important, but that doesn't mean you should

0:04:09.840 --> 0:04:14.240
<v Speaker 2>do anything about it, for the reasons we have discussed clearly.

0:04:14.440 --> 0:04:17.159
<v Speaker 2>You know, whether the economy is doing better or worse

0:04:17.200 --> 0:04:21.200
<v Speaker 2>than expected, is going to affect stock prices. The problem

0:04:21.320 --> 0:04:24.440
<v Speaker 2>is all of the evidence, there's not a single study

0:04:24.480 --> 0:04:27.839
<v Speaker 2>I'm aware of that says anything different that.

0:04:27.720 --> 0:04:29.440
<v Speaker 3>The odds of your being able.

0:04:29.279 --> 0:04:35.159
<v Speaker 2>To exploit this news by trading quickly on it. That

0:04:35.400 --> 0:04:40.080
<v Speaker 2>means market timing. I mean, you know, there's very, very

0:04:40.279 --> 0:04:43.440
<v Speaker 2>very few people who have been successful doing it. And

0:04:44.400 --> 0:04:48.320
<v Speaker 2>one of the great ironies is people idolize Buffett and

0:04:48.360 --> 0:04:51.840
<v Speaker 2>Peter Lynch, and both of them told you never to

0:04:51.920 --> 0:04:55.719
<v Speaker 2>try to time the market, and yet people not only

0:04:55.760 --> 0:04:59.400
<v Speaker 2>ignore their advice while idolizing, they tend to do the

0:04:59.560 --> 0:05:02.800
<v Speaker 2>very opposite. That's why I wrote the book Think Act

0:05:02.839 --> 0:05:04.320
<v Speaker 2>and invest like buffet.

0:05:04.640 --> 0:05:08.320
<v Speaker 3>Investing is simple, just act like buffet. But that's very.

0:05:08.160 --> 0:05:11.680
<v Speaker 2>Odd for the emotional reasons we've talked about. And the

0:05:11.800 --> 0:05:17.919
<v Speaker 2>media plays on these fears and emotions. They know that

0:05:18.040 --> 0:05:21.560
<v Speaker 2>people will react. They want you to tune in. That's

0:05:21.600 --> 0:05:24.720
<v Speaker 2>how they make money selling those commercials while you're watching.

0:05:25.080 --> 0:05:26.640
<v Speaker 3>But that's not in your interest.

0:05:27.160 --> 0:05:32.640
<v Speaker 1>So there's an endless array of other corporate news, dividends, mergers,

0:05:32.839 --> 0:05:37.680
<v Speaker 1>bond issue in, stock splits, acquisitions. What should an investor

0:05:37.760 --> 0:05:41.000
<v Speaker 1>do in response to all of this breaking news on

0:05:41.080 --> 0:05:43.680
<v Speaker 1>the corporate side.

0:05:43.240 --> 0:05:44.240
<v Speaker 3>Literally nothing.

0:05:44.600 --> 0:05:48.200
<v Speaker 2>If you have a well thought out plan to make

0:05:48.240 --> 0:05:53.640
<v Speaker 2>sure you've anticipated, you know, bear markets, recessions, black swans

0:05:53.640 --> 0:05:56.480
<v Speaker 2>that could hit the market, making sure you don't take

0:05:56.600 --> 0:06:00.000
<v Speaker 2>any more risk than you have the ability, the willingness,

0:06:00.279 --> 0:06:03.920
<v Speaker 2>and need to take, because if you do, when those

0:06:04.000 --> 0:06:08.719
<v Speaker 2>black swan or negative events occur, you will likely to

0:06:09.320 --> 0:06:13.560
<v Speaker 2>have problems driven by fear, and you will panic and

0:06:13.640 --> 0:06:16.680
<v Speaker 2>sell because your stomach will take over. And even if not,

0:06:16.880 --> 0:06:18.800
<v Speaker 2>you're going to get so upset, you're going to lose

0:06:18.800 --> 0:06:21.960
<v Speaker 2>sleep worrying, and life's too short not to enjoy it.

0:06:22.400 --> 0:06:26.000
<v Speaker 2>So you're better off making sure your plan doesn't exceed

0:06:26.080 --> 0:06:29.640
<v Speaker 2>your risk tolerance or your need to take risk, so

0:06:29.680 --> 0:06:32.320
<v Speaker 2>you don't subject yourself to those.

0:06:33.920 --> 0:06:35.000
<v Speaker 3>Emotional issues.

0:06:35.040 --> 0:06:38.320
<v Speaker 2>And lastly, if you can't do it yourself, that's the

0:06:38.360 --> 0:06:42.320
<v Speaker 2>biggest role of a financial advisor. Number one, get the

0:06:42.400 --> 0:06:45.839
<v Speaker 2>plan right in the first place, and then play Clint

0:06:45.880 --> 0:06:49.599
<v Speaker 2>Eastwood his cop and say, you know, reminder, hold that

0:06:49.720 --> 0:06:52.120
<v Speaker 2>six gun to the guy's head and say here, you

0:06:52.200 --> 0:06:56.120
<v Speaker 2>sign that investment policy statement, go ahead and make my day.

0:06:57.400 --> 0:07:01.320
<v Speaker 1>So lately we've seen a big uptick in activist investors.

0:07:01.920 --> 0:07:05.320
<v Speaker 1>What happens if you hold Disney or Apple or Tesla

0:07:05.520 --> 0:07:08.599
<v Speaker 1>as part of your portfolio. What should you do when

0:07:08.640 --> 0:07:11.720
<v Speaker 1>these activists come out of the out of the woodwork

0:07:12.040 --> 0:07:13.800
<v Speaker 1>and start agitating for change.

0:07:14.320 --> 0:07:19.200
<v Speaker 2>I would suggest nothing, because the markets already incorporated that

0:07:19.400 --> 0:07:24.120
<v Speaker 2>information into prices. The smart guys like Buffett and Goldman

0:07:24.160 --> 0:07:27.119
<v Speaker 2>and Goldman Sachs, and you know every one of these

0:07:27.280 --> 0:07:31.520
<v Speaker 2>actively managed funds, they're already reacting to that news and

0:07:31.560 --> 0:07:35.440
<v Speaker 2>then their collective wisdom. The stock price is at that

0:07:35.680 --> 0:07:38.960
<v Speaker 2>moment the best estimate of the future price.

0:07:39.000 --> 0:07:41.360
<v Speaker 3>And again, if there was evidence that.

0:07:41.240 --> 0:07:44.160
<v Speaker 2>People could exploit it, where do we see it in

0:07:44.280 --> 0:07:49.960
<v Speaker 2>persistent outperformance? Over ninety percent of the active managers underperform

0:07:50.080 --> 0:07:54.080
<v Speaker 2>over the long term in every single asset class, and

0:07:54.120 --> 0:07:55.760
<v Speaker 2>that's even before taxes.

0:07:56.520 --> 0:07:58.840
<v Speaker 1>Well recording this, it's twenty twenty four. It's a big

0:07:58.880 --> 0:08:02.480
<v Speaker 1>election year in the United States. We have two candidates,

0:08:03.440 --> 0:08:07.200
<v Speaker 1>both of whom either are or have been president previously.

0:08:07.680 --> 0:08:10.840
<v Speaker 1>People are forecasting a lot of turmoil around this election,

0:08:11.520 --> 0:08:15.480
<v Speaker 1>maybe even some civil or unrest. How should we adjust

0:08:15.560 --> 0:08:19.679
<v Speaker 1>our portfolios for the big presidential election in November twenty

0:08:19.720 --> 0:08:20.200
<v Speaker 1>twenty four?

0:08:20.800 --> 0:08:24.320
<v Speaker 2>Again, I would urge that everything that you just told

0:08:24.320 --> 0:08:27.520
<v Speaker 2>me is known by the market. That uncertainty is built

0:08:27.560 --> 0:08:30.600
<v Speaker 2>into the market. Unless you've got a clear crystal ball

0:08:30.640 --> 0:08:34.960
<v Speaker 2>about what's going to happen, and nobody does, then the

0:08:35.000 --> 0:08:38.959
<v Speaker 2>best thing you can do is diversify. And the second

0:08:39.040 --> 0:08:41.960
<v Speaker 2>thing is you want to make sure you do not

0:08:42.200 --> 0:08:48.080
<v Speaker 2>let your political biases influence your investment decisions. There's actually

0:08:48.160 --> 0:08:52.000
<v Speaker 2>good academic research that shows this. When the party you

0:08:52.200 --> 0:08:56.920
<v Speaker 2>favor is in power, you get higher returns than when

0:08:56.960 --> 0:08:58.679
<v Speaker 2>the party you favor.

0:08:58.360 --> 0:08:59.439
<v Speaker 3>Is out of power.

0:09:00.000 --> 0:09:03.560
<v Speaker 2>The reason is, for example, in two thousand, when we

0:09:03.640 --> 0:09:06.319
<v Speaker 2>got hit by nine to one one, the events had

0:09:06.320 --> 0:09:09.320
<v Speaker 2>a big bear market. Well, if you were a publican,

0:09:09.440 --> 0:09:13.240
<v Speaker 2>you were more likely to think that the Republicans would

0:09:13.280 --> 0:09:16.160
<v Speaker 2>figure out what actions we would need to get out

0:09:16.200 --> 0:09:19.480
<v Speaker 2>of it, and then therefore you were much less likely

0:09:19.520 --> 0:09:25.560
<v Speaker 2>to panic and sell, and Republican investors outperformed Democratic investors

0:09:25.640 --> 0:09:30.360
<v Speaker 2>during the Bush administration and then the Trump administration. However,

0:09:30.400 --> 0:09:33.800
<v Speaker 2>the reverse was true when Obama was president. We got

0:09:33.840 --> 0:09:38.800
<v Speaker 2>hit with theaight financial crisis, and Democratic investors would have

0:09:38.840 --> 0:09:43.400
<v Speaker 2>had more confidence and his ability to maneuver out of it.

0:09:43.720 --> 0:09:46.800
<v Speaker 2>They were more likely to stay the course uh, and

0:09:46.880 --> 0:09:50.680
<v Speaker 2>therefore they were able to gain the rebound in the market,

0:09:51.120 --> 0:09:54.240
<v Speaker 2>and the same thing is now true under Biden. So

0:09:54.640 --> 0:09:59.200
<v Speaker 2>make sure you do not allow your political biases to

0:09:59.360 --> 0:10:03.480
<v Speaker 2>impact your investments. If you're concerned about geopolitical risk, the

0:10:03.520 --> 0:10:07.480
<v Speaker 2>best thing to do is build a highly diversified plan

0:10:08.080 --> 0:10:12.360
<v Speaker 2>so that can protect you, like buy insurance against having

0:10:12.600 --> 0:10:14.720
<v Speaker 2>all your assets in the wrong basket.

0:10:15.360 --> 0:10:18.800
<v Speaker 1>So earnings are key drivers of stock prices. How should

0:10:18.840 --> 0:10:23.360
<v Speaker 1>investors respond to the just torrents of quartally earnings that

0:10:23.440 --> 0:10:25.160
<v Speaker 1>come out every three months.

0:10:25.480 --> 0:10:28.880
<v Speaker 2>There is some evidence here to support the idea that

0:10:28.960 --> 0:10:33.360
<v Speaker 2>when there are positive or negative earning surprises is called

0:10:33.400 --> 0:10:36.200
<v Speaker 2>the peed factor post.

0:10:36.080 --> 0:10:37.720
<v Speaker 3>Earnings announcement drift.

0:10:38.240 --> 0:10:42.160
<v Speaker 2>That because of momentum in stocks, which does exist, if

0:10:42.200 --> 0:10:45.959
<v Speaker 2>you get a surprise on the upside, investors are slow

0:10:46.080 --> 0:10:49.240
<v Speaker 2>to react a little bit and the prices will tend

0:10:49.280 --> 0:10:54.080
<v Speaker 2>to rise to some degree. Now, everyone who's an academic

0:10:54.200 --> 0:10:58.839
<v Speaker 2>and practitioner with an MBA or PhD in finance and math,

0:10:59.200 --> 0:11:03.480
<v Speaker 2>they already know this, So that evidence is shrinking. So

0:11:03.640 --> 0:11:06.840
<v Speaker 2>my advice is you're probably best off just to ignore

0:11:06.880 --> 0:11:10.720
<v Speaker 2>it and don't trade. But there is some evidence of that.

0:11:10.840 --> 0:11:13.240
<v Speaker 2>So if you're thinking you're going to get out of

0:11:13.280 --> 0:11:16.400
<v Speaker 2>the stock anyway, and you had a negative earning announcement

0:11:16.679 --> 0:11:19.679
<v Speaker 2>that might trod you to do it, and maybe you'll

0:11:19.679 --> 0:11:22.520
<v Speaker 2>hold on a little longer. If you think, Okay, I've

0:11:22.520 --> 0:11:25.160
<v Speaker 2>got to rebalance and sell, maybe you do hang on

0:11:25.280 --> 0:11:26.040
<v Speaker 2>a little longer.

0:11:26.840 --> 0:11:29.920
<v Speaker 1>So to wrap up, investors who have a long term

0:11:30.040 --> 0:11:35.360
<v Speaker 1>time horizon should expect distractions along the way. But the

0:11:35.480 --> 0:11:41.960
<v Speaker 1>data shows, whether it's economic data, geopolitics, quarterly earnings, analyst

0:11:42.080 --> 0:11:46.600
<v Speaker 1>upgrades and downgrades, corporate news, none of us have any

0:11:46.640 --> 0:11:50.640
<v Speaker 1>extra insight as to how those events will unfold and

0:11:50.679 --> 0:11:54.679
<v Speaker 1>how they'll impact stock prices in the future. Your best

0:11:54.679 --> 0:11:58.320
<v Speaker 1>bet stick with stocks for the long haul and ignore

0:11:58.360 --> 0:12:02.680
<v Speaker 1>the noise. Better rerit halts. And this is Bloomberg's at

0:12:02.679 --> 0:12:03.480
<v Speaker 1>the Money.

0:12:05.000 --> 0:12:05.240
<v Speaker 2>Rama.

0:12:12.280 --> 0:12:19.160
<v Speaker 1>Wow wow Wow, Ramma Fel