- By Vivek Kaul
Greece will soon be in major trouble.
The dollar is rising against other currencies.
The global cues are not good.
Oil price has fallen to below $50 per barrel. This means that the world is entering an era of deflation (Deflation, a scenario of falling prices, is the opposite of inflation, and I am amazed how easily market analysts who appear on television use this term).
The Modi effect is slowing down.
The foreign investors need to realign their portfolios with the changing global economic scenario.
And the proverbial, Indian economy is not doing well and corporate investment is needs to pick up. Two days later on January 8, 2015, the Sensex rallied 366 points or 1.4%. Market analysts and the business media told us that value buying was now coming in and this had led to the rally.
What amazes me is that investors suddenly saw value in stocks with the market falling by just 3%? Benjamin Graham must be turning in his grave. He clearly never would have envisaged a day like this.
Also, the investors did not see value on January 7, 2015, when the Sensex was almost flat. It fell by around 78.6 points or 0.3% on that day. But they suddenly saw value on January 8, 2015. What changed overnight? That no market analyst bothered to explain.
In the Indian context, the Foreign Institutional Investors (FIIs) have been driving the market for a while now. On January 6, 2015, they net sold stocks worth Rs 1,534.23 crore. But this was neutralized to some extent by domestic institutional investors buying stocks worth Rs 1,079.6 crore on the same day.
Markets go up. Markets go down. And just because analysis exists doesn't mean we analyse everything.
I haven't heard a single market analyst or a journalist in the business media till date say that today's stock market movements were due to random fluctuations. As John Allen Paulos writes in A Mathematician Reads the Newspaper: "Almost never does a stock pundit say that market's or a particular stock's activity for the day or the week or the month was largely a result of random fluctuations."
With so many numbers and stories going around it is always possible to say something which on the face of it sounds very sensible. "The business pages, companies' annual reports, sales records, and other widely available statistics provide such a wealth of data from which to fashion sales pitches that it's not difficult for a stock picker to put on a good face...All that's necessary is a little filtering of the sea of numbers that washes over us," writes Paulos.
This is precisely what has been happening over the last few days. The information and analysis being provided is essentially adding to the clutter. As Nassim Nicholas Taleb writes in Fooled by Randomness: "The difference between noise and information...has an analog: that between journalism and history. To be competent, a journalist should view matters like a historian, and play down the value of the information, he is providing."
This Taleb, feels can be done by saying: "Today the market went up, but this information is not too relevant as it emanates from noise". But in an era of 24 hour news channels this is easier said than done. "Not only is it difficult for the journalist to think more like a historian, but it is, alas, the historian who is becoming more like the journalist [and to add my two bit so are market analysts]...If there is anything better than noise in the mass of "urgent" news pounding us, it would be like a needle in a haystack. People do not realize that the media is paid to get your attention. For a journalist, silence really surpasses any word," writes Taleb.
To be fair to the business news channels, the business newspapers follow the same formula of trying to come up with an explanation for market movements all the time. It's just that since they do not have to react instantly to everything, some amount of noise gets filtered out in their reporting.
A few years back I happened to interview valuation guru Aswath Damodaran and asked him a fairly straightforward question: How much role does media play in influencing investment decisions of people? The reply he gave was very interesting: "Media and analysts are followers...Basically when I see in the media news stories I see a reflection of what has already happened. It is a lagging indicator. It is not a leading indicator. I have never ever found a good investment by reading a news story. But I have heard about why an investment was good in hindsight by reading a news story about it. I am not a great believer that I can find good investments in the media. That's not their job anyway."
This is something that investors need to keep in mind while following the media in their quest to understand why are the markets moving the way they are. It is worth remembering that business news channels and the business newspapers need to operate even when there is no major news.
As Maggie Mahar writes in Bull-A History of the Boom and Bust, 1982-1984: "The perennial problem for the media is that balance sheets do not fluctuate on a daily basis. Once a reporter has laid out a company's assets and debts, how does he fill the news hole the next day? Only by tracking market's daily performance."
Analysts help the business press in filling up the daily space. This is something that former Morgan Stanley analyst Andy Kessler writes about in his book Wall Street Meat: "The market opens for trading five days a week... Companies report earnings once every quarter. But stocks trade about 250 days a year. Something has to make them move up or down the other 246 days [250 days - the four days on which companies declare quarterly results]. Analysts fill that role. They recommend stocks, change recommendations, change earnings estimates, pound the table-whatever it takes for a sales force to go out with a story so someone will trade with the firm and generate commissions."
And once analysts have a daily opinion, the media gets some masala to fill up its daily space.
The trouble is that while the media ends up filling up space, investors who follow the media are bound to end up confused if they follow the media on a daily basis.
It is worth remembering here what hedge fund manager Bill Fleckenstein told Mahar: "The trouble is that investing doesn't lend itself to play-by-play reporting...Speculation does, but investing doesn't."
Have you ever made money by in the stock market by following the recommendations being made by the market analysts and business media? Post your comments or share your views in the Equitymaster Club.
Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.