Sunday, August 29, 2010

Reading the Newspaper Will Keep you Adequate

I've recently re-discovered the New York Times in print and so read Elizabeth Sanberg's "4 Ways Reading the Newspaper Will Make You Rich and Famous" @ WiseBread with interest. Although this wasn't a heavy piece, it reminded me of the opposite thought I had recently, namely that mass media is a dangerous investment guide.

Whether we realize it or not, there are two meanings to "staying informed" in investing:

- Knowing about things before or as they happen.
- Knowing about things after they had happened.

The first type of information is investment gold - it gives you the first-mover advantage in directing your money. This information isn't useful for very long - once others find out, they direct their money the same way and prices change. If you're going to jump on an investment, you want to be the first one to do so. The problem with this type of information is that it's expensive (this is the reason financial firms hire brilliant analysts and move their trading computers as close to the exchange as possible) and it is often illegal to trade upon. For example, an accountant at a firm which is about to release its earnings is in a unique position to predict market reaction to the news - but taking advantage of this information is illegal insider trading.

The second type of information is what we get in mass media - public information well after the event. By the time one reads about a company's earnings in the paper, the trading opportunity has passed.

It is probably a bad idea to invest based on what you read in the news because the price already reflects the news by the time you get it!

I am not saying it's not important to keep up with the news, just don't expect to out-perform the market. Investing on publicly known news carries with it an additional danger - trading along with everyone else. You aren't going to get a good price when everyone is buying (or selling) too.

What about trends? Is the knowledge of general trends out there not valuable for investing? Momentum investors say yes, but fundamentals rarely bear out. One could gauge the point in a trend's life at which it's commonly reported on by thinking about their own field. In my areas of expertise (finance and technology) I find that a concept is old hat by the time I read about it in the Times - in other words experts have been thinking about it for months or years. The money that was there to be made on the trend has already been made.

If anything, a concept's appearance in mass media is a signal for contrarian investors -  in the Greater Fool Theory view of the world, it's an indication that the latest rung of fools is about to do their investing.

When "Flip This House" appeared on A&E in 2005, was that a bullish or bearish signal for real estate investing?

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