Have you ever noticed how the stock market reacts differently to the same reported events? Why is it that we sometimes sell off "in response to rising oil prices," but at other times the "market rallied, despite the rise in the price of crude"? How come a selloff was caused by a suicide bombing in Iraq, but a week later, the markets shrugged off an even larger, deadlier bombing? Is it possible that the markets are responding to forces other than the latest headlines? Short answer: Absolutely. Yes. Longer answer: Keep reading. As we discussed last week , it's clear that predictions of pontificating pundits have an extremely short shelf life and can be safely ignored. But it's not just the talking heads who can throw you off your game. The value of the entire financial news complex -- both print and electronic -- seems to be hugely misunderstood by investors. Even worse, many investors misapply what they hear; they ignore data, focusing instead on headlines and occasionally, the opinions. There are at least three problems with this approach:
First, news is hardly new. The vast majority of it is backward-looking, informing you as to what has happened already. Investing is about what is going to happen; what's occurred in the past may be of interest, but it's hardly germane to the investment process. Indeed, by the time the news is "out," it already has been built into the stock price.
Worse yet, old news can have an impact on your thought process. That's why I read The Wall Street Journal on the train home, and not on the way to work. Why? It forces me to recognize that the news is stale, and I avoid allowing it to influence my decision-making process. Instead, it becomes for informational proposes only (Yes, I really do this).