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At the Money: Lose the Noise · Masters in Business

• 0:16
  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 Squedrow. 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 is.
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  Speaker 3: 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 as
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  Speaker 2: would jump on that and say, gee, you what a
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  Speaker 2: 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. In fact, the stock row because the news,
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  Speaker 2: while bad, was not as bad as expected.
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  Speaker 3: The price went up.
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  Speaker 2: And adjusted to that new information immediately. Research has sewn
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  Speaker 2: something like ninety five percent of the move occurs literally
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  Speaker 2: in the first price, 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
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  Speaker 2: rest 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.
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  Speaker 3: That means market timing.
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  Speaker 2: I mean, you know, there's very, very very few people
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  Speaker 2: who have been successful doing it. And one of the
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  Speaker 2: great ironies is people idolize Buffett and Peter Lynch, and
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  Speaker 2: both of them told you never to try to time
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  Speaker 2: the market, and yet people not only ignore their advice
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  Speaker 2: while idolizing, they tend to do the very opposite. That's
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  Speaker 2: why I wrote the book Think Act and invest like buffet.
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  Speaker 2: 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.
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  Speaker 3: Side, 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 willing,
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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.
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  Speaker 3: Panic and sell because your stomach will take over. And
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  Speaker 3: even if.
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  Speaker 2: Not, you're going to get so upset, you're going to
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  Speaker 2: lose sleep worrying, and life's too short not to enjoy it.
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  Speaker 3: So you're better off making sure your plan.
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  Speaker 2: Doesn't exceed your risk tolerance or your need to take risk,
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  Speaker 2: so 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 gold
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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 they're 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 unrest. How should we adjust our
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  Speaker 1: portfolios for the big presidential election in November twenty 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.
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  Speaker 3: 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 3: They were more likely to stay the course. UH and
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  Speaker 3: therefore they.
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  Speaker 2: Were able to gain the rebound in the market, and
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  Speaker 2: the same thing is.
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  Speaker 3: Now true under Biden.
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  Speaker 2: So make sure you do not allow your political biases
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  Speaker 2: to impact your investments. If you're concerned about geopolitical risk,
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  Speaker 2: the best thing to do is build a highly diversified
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  Speaker 2: plan so that can protect you, like buy insurance against
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  Speaker 2: having 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 earnings announcement drift.
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  Speaker 3: That because of momentum.
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  Speaker 2: In stocks, which does exist, if you get a surprise
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  Speaker 2: on the upside, investors are slow to react a little
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  Speaker 2: bit and the prices will tend to rise to some degree. Now,
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  Speaker 2: everyone who's an academic and practitioner with an MBA or
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  Speaker 2: PhD in finance and math, they already know this, So
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  Speaker 2: that evidence is shrinking. So my advice is you're probably
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  Speaker 2: best off just to ignore it, don't trade. But there
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  Speaker 2: is some evidence of that. So if you're thinking you're
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  Speaker 2: going to get out of a stock anyway, and you
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  Speaker 2: had a negative earning announcement, that might trod you to
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  Speaker 2: do it, and maybe you'll hold on a little longer.
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  Speaker 2: If you think, Okay, I've got to rebalance and sell,
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  Speaker 2: maybe you do hang on 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. Betr Rid halts And this is Bloomberg's at
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  Speaker 1: the Money w