Investor Poison

Investor Poison

If you are an investor and you want to make good investments, make sure you know how to deal with Investor Poison. Investor Poison is the media that throws story after story at you to elicit a response from you. Why would they do that? The answer is to addict you to their information.

An investor must know the difference between truth and hype. One of the greatest investors in the world, Ray Dalio, encourages his firm to practice a culture of absolute truth, no matter what. At all times, everyone in the firm must say what they are thinking, even if it is negative toward someone else. Many argue that it is a toxic culture to work in, but as investors, truth is paramount – and Dalio knows it.

Is the point that media is not truthful?  Absolutely not, but that they take pieces of truth and hype it to conjure up emotions to cause their audience to become addicted to their information. For example, take the Inverted Yield Curve and the trade war stories prevalent currently in financial news.  Are they truly happening? Yes, but are they the boogeymen that  media has made them out to be? No. The government of China’s treatment of international companies is a problem, and they must reform, or market actors need to impose sanctions on Chinese companies in the global market. China exports $550 billion in goods to the United States. About $250 billion of these goods are being targeted for tariffs. The United States is an $20 trillion economy. If Congress acted in concert with the president and directed tariffs at all global trade, then we should tremble, but this targeted attack against countries that are abusing US companies is needed (though the unique Trump personality may not be). The yield curve is inverted (short-term rates are higher than long-term rates), but the reason it is inverted is not the same as in the past when central banks used the yield curve to combat inflation. There is no significant inflation to combat. Yields on the short end were rising in order to normalize the yield curve and allow savers to get a fair rate of return on their savings.  At first, long-term rates kept moving higher with short term rates until it appeared that the global economy was slowing and that a worldwide recession might be on the horizon. This has caused hedge funds to try and front-run central banks around the world and buy long bonds before another wave of assumed quantitative easing takes place. Front-run means to guess what the central banks will do and buy before they buy and then sell for a profit to them when they do buy. Quantitative easing means the Central Banks buy long bonds in their countries to drive interest rates lower to encourage economic activity. There’s a reasonable argument that says  the economy is doing better than perceived, and recession will not happen in the near term. If correct, , then less quantitative easing will likely happen, which will require hedge funds to unwind some of their trades – potentially at a  significant loss.

Another concept that is paramount to an investor is how the market handles the future. Markets react in anticipation of events six months or more into the future. What is known by the news sources and currently being reported has already been perceived and factored into the markets. If you think back in time , you would find this one buy indicator has been occasionally spot-on: when media says sell, wise investors  buy, and when they say buy, wise investors sell.  Here are some great examples:

  1. Business week 1979 cover story, “The Death of Equities,” proved to be one of the greatest buying opportunities of US stock history. Though markets did poorly for 2 more years, the Dow Jones average stood at 800. Today, 40 years later, it is around 26,000 – a 30-fold return.
  2. Time Magazine’s 1999 cover page showed Jeff Bezos and Amazon, when Amazon traded for about $113 per share. One year later, Amazon traded for about $16 per share. It took until 2010 to get back to even. Ultimately, they were right, but the timing was detrimental for many investors.

One last point to understand about media is that those investors with a voice in the media can use their influence to help unwind, drive higher, or acquire a secure position. If I am a big hedge fund and I have a bet on the market going lower, I can feed the media with credible negative stories on the market. With this strategy, I may be able to move sentiment in the short term in my favor and sell for a short-term profit. Large investment firms use this sway with the media frequently, and if done carefully, without any risk of fines from the Securities and Exchange Commission (SEC) for securities violations. Large firms influencing mass media gives many investors good reason to be wary of news sources poisoning investing decisions.

The ideal use of media is to identify seemingly tangential pieces of information about what might happen tomorrow that may not be reported in the mainstream. For example, since no one seems to be concerned about inflation in today’s world according to mass media, I am focusing on stories that may indicate triggers of inflation in the coming years.

This is not necessarily to say that media is wrong or lying, but merely to say that there is an economic bias baked into the media’s business model to try to elicit sustained and repeated attention from audiences. Also, by the time the media begins to hype a story, the markets have likely already discounted the bad news, and it is too late to respond.

We write this to you to reassure you. When you hear these stories, we likely heard them months before they became a big news story.  Please call anytime you do have concerns, but just be careful not to absorb too much poison from news sources.