Looking for the truth
As the EU referendum debate showed the constant 24-hour flow of news can be damaging to stock and bond markets. Investor behaviour can swing from irrational exuberance to pervasive gloom within seconds depending on the information. Ironically though those who ignore the daily diatribe have a better chance of beating the indices.
This is corroborated by a Harvard study on investment habits that showed investors who received no news performed better than those who received a constant stream of information, good or bad. Moreover, among investors who were trading a volatile stock, those who remained in the dark earned more than twice as much money as those whose trades were influenced by the news.
Traditional outlets are not the only ones that have an impact but also social media such as Twitter which can be first to the market with information. Twenty-eight per cent of news about mergers and acquisitions breaks on this medium, according to a 2015 study by Selerity, a financial data platform made famous last year for publishing Twitter’s earnings before the social media company did.
It also has the power to significantly move the needle, as witnessed by a bogus tweet about an explosion at the White House last year. The value of US stocks plummeted around $90bn although markets recovered quickly when it became apparent the information was false.
While much of this behaviour may pertain to the retail investor, pension funds, which albeit take a long term view, have to navigate in markets that become volatile and at times they can be just as temperamental. As Iain Cowell, Head of UK & Ireland Solutions team at Allianz Global Investors, who conducted his own separate study, puts it, “Technology has vastly improved, information is ubiquitous, but human nature hasn’t changed at all.”
Taking a more in depth look at the role of technology, he found that as with any new developments it is a mixed bag of opportunities and challenges. For example, real-time quotes and news delivery as well as access to regulatory filings on a fund manager’s desktop via high-speed networking on fast, dependable PC can turn the raw information into models, presentations and investment insights. However, it also limits the time that fund managers have to think things through and more thoughtfully.
Cowell also found that it is easier to search for inputs to support or refute an idea or potential input but that it is also important for investors to pull away from the “information firehose”. “If you don’t allow yourself time to reflect and imagine what others are missing/what might be important a year out, it’s becoming trickier to add value,” he adds.
In the end it is about cutting out the noise, myths and rumours to focus on the truth and leveraging that knowledge effectively. Of course, this is easier said than done.
Lynn Strongin Dodds