The Problem with the News

Mar 22, 2014

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
When I first started investing, I spent a lot of time reading the news in order to understand movements in the financial markets. After all, every day after markets close, there is news explaining why the market moved in the direction that it did. At the same time, there is plenty of journalism that aims to predict what the markets will do in the future.

The problem with relying on the news as an accurate source of information is that the news and opinions are typically biased. The bias is towards sensationalism. This means that the media blows events out of proportion and typically spends too much time talking about low probability crisis type events. Their primary goal is to increase readership, and not to be unbiased.

For example, during the Eurozone debt crisis , there were many predictions that the euro would collapse and the Eurozone would break up. If you read the news during this time, you may get the idea that this was the most likely outcome of the Eurozone crisis. Another example is US Federal Reserve quantitative easing (QE). The most common prediction of QE was that hyperinflation would take place in the US, sparking a crisis, and a huge increase in the price of gold. None of this has come close to happening.

In both cases, the news focused on low probability crisis type outcomes. Sometimes, these events do lead to actual crises, but in practice it is not very common. The lesson I've taken from this is that it is a bad idea to base investment decisions on what the financial press predicts is going to happen. A better approach is to simply focus on the facts alone.

Suppose I wanted to know whether QE was going to cause high inflation like most of the press claims it will. The best thing to do is to look at US inflation figures over the last 4 years while QE has been in place. It turns out that US inflation after QE has ranged between 0% and 4%, around the same range as it has been in the years before QE. I would then conclude the QE does not seem to have a significant impact on inflation.

Of course rare events like hyperinflation are still possible even if they have not occurred. But the point here is that this would be a rare event. And when you invest, you should make predictions based on what is most likely to happen, not on events that have a low probability. My approach to investing now is to not put large weight on the news and opinions of the financial press. Instead, I focus more on the economic and financial data (i.e. the facts) and make predictions and investment decisions based on these facts.

We are asking the question in the Equitymaster club forum: How important are the opinions of the financial press to your investment decisions?

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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1 Responses to "The Problem with the News"

dilip

Mar 23, 2014

all these reportings.. gives viewpoint.
5 min wrapup and daily reckoning can highlight such low probable events. so we can not just read view point and not get carried by it,
thx.
alternately it should discuss more of high probability events. data u are always mentioning.
inferring of thse data is important and happens the way you write on it.
thx

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