In case you hadn’t noticed – hey, quit texting and pay attention – we live in “the Information Age.” Anything you want to know about is only a few clicks away. Current events, financial news, political events, world news, sports, fashion, the exact date of Armageddon, whatever you want, it’s out there.
And that’s all well and good. Except of course for when it’s not.
The problem with that all of this wonderful information is the danger of taking things at face value. For all of this wonderful information is created and presented by, well, people. And I am sure I don’t have to lecture you about the dangers of listening to other people, do I? The “news” used to be sort of a “we report, you decide” proposition. These days in many cases, the news seems to amount more to “we decide, then we report.” And of course, those of us who were sort of programmed during our educational years to gather news and actually believe what we hear can run into a problem. For it’s not so much that the people reporting the information don’t know what they are talking about but that they know so much that isn’t so.
The Dangerous Headline
Some of my favorite financial websites have a tendency to list articles positing diametrically opposed ideas one after the other. I am certain that they do this on purpose as sort of a point/counterpoint thing. But I’ll bet it drives a lot of people nuts. For example:
-Crude Oil prices to Soar as World Demand Increases.
-Crude Oil to Collapse as Oil Producers Increase Production.
-Hooray! Improvements in Drilling Techniques make more Oil Available.
-Earth’s Atmosphere to Implode due to Increased Burning of Fossil Fuels.
-U.S. Dollar to Soar as European Debt Doubts Linger
-U.S. Dollar to Collapse as it Loses World Reserve Currency Status
And so on and so forth. So who’s right and who’s wrong? If you are like most people you tend to click on those articles that appear to reinforce the beliefs you already hold. Or maybe once in awhile you click on the “diametrically opposed” headline just to reinforce the fact that the people who disagree with you have no idea what they are talking about.
The bottom line is that in the majority of cases, the writers are selling a particular point of view, not necessarily a set of facts. Likewise too many readers are essentially looking to “buy” a particular point of view in order to reinforce their own beliefs.
If “Headlines” Were Useful
If headlines were useful, just think back about some of the things that would already have happened in the last 12 months:
-The euro would no longer exist: a year ago there was a great deal of talk about how the euro currency was going to collapse and ultimately cease to exist. Could this still happen? Sure. But at the moment, the euro is all of about 5-6% below its level of 12 months ago. “The Sky” did not exactly “Fall” as predicted.
-A Number of European Countries would already have defaulted: A great deal of time, effort and energy was devoted in the past 12 months to predicting when various countries such as Greece, Spain, Portugal and others would see their economies collapse. One day these countries were toast, the next day Germany or someone else was going to bail them out.
-Crude Oil would be at roughly $200 a barrel by now: People around the globe are feeling the pain of high gas prices. The scary thing is at the moment raw crude oil is only about 2/3rds of the peak price it reached in 2008. By the way, here is a “fun” trick question to ask your friends:
True or False: A barrel of crude oil costs less today than it did in May 2011?
(Answer: True. NOTE: As your friends try to process the fact that gas prices are soaring while crude oil has actually declined is the past 10 to 12 months, it is fun to watch the veins in their foreheads bulge into interesting formations.)
-The stock market would be falling hard as the economy went into a double dip recession: Here is where politics tends to color most people’s viewpoints. Those who are pro-Obama will tout the slightest improvement in any still-dreadful economic measure as proof positive that “happy days are here again.” Those who are anti-Obama simply dismiss any and all positive economic news. Hard to develop a good sense of economic reality when one views everything through blue or red colored glasses.
And so on and so forth. Exact predictions are by and large not worth the paper they are printed on, er, I mean the digital space that they appear in.
Forget the Prediction and Focus on the Trend
In the past year it was possible to make a lot of money playing the short side of the euro. Not because it was or is ultimately going to trade down to zero, but because the overall trend was down.
Likewise, it was possible to make money in crude oil on both the long side and the short side if one was willing to look past the blaring headlines and prediction and focus instead on the trend in price. The same is true for stock market and t-bonds (See Figure 1).
Figure 1 – Trend-following in four key markets - Euro, Crude Oil, S&P 500, T-Bonds
Sensational headlines and bombastic predictions just have a way of sticking in our heads. This is simply human nature. Just for the record, human nature costs investors a lot of money. If you want to make money in the long run, before entering into any position, ask and answer the following simple questions:
#1. Do I have an objective way to categorize the current trend of the market/stock/futures etc. that I want to trade. (If “No”, stop here and get an answer to this question before proceeding).
#2. Based on my objective trend following measure (you do have one now, right?), what is the overall trend of this market right now?
#3. Am I considering a position in the direction of the overall trend?
#4a. If “No” to #3, what is my rationalization for taking a position against the major trend?
#4b. If “Yes” to #3, or if I have a good rationalization for taking a position after a “No” answer, what will it take to get me out of my position? A stop-loss, a profit-target, a break below a moving average? Something else?
If you ask and answer these questions before you put on any position, in the long run you will find yourself far a heading of the texting, tweeting, comment posting masses.
Now if you will excuse me, I just came across a really interesting looking article that will reinforce my belief that I am right about, er, um, well, never mind.
Staff Writer and Author of “Seasonal Stock Market Trends”
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