Thursday, September 15, 2016

Reading the financial news - throw out half of what you read


I am a news junkie. It is an addiction, but I am breaking the habit and I will be better for it. As an analyst, reading all the news that is fit to print is not a good value proposition. It just takes up too much time and leads to the confusion of work with effort.

Too often news articles just try and fit the facts with current market behavior. If employment figures surprise on the upside and the market rises, it is because real economy is growing. If the market falls, then it is because expectations are that the Fed will raise rates. Granted the weights of factors change but not to the degree suggested by journalists. Events are used to explain the action not tell us about the future.

So what is the answer for the news junkie going through withdrawal? Here is a simple list that I find helpful:
  • Focus on just one or two summaries for the week.
  • Focus on the data. No data with news, don’t read. 
  • Focus on stories that are testable with data. Focus on the source. If you need to read, go to the source after getting a summary. Otherwise you are having someone else edit your thinking. For example, what actually did the Fed official say?
  • If the opinion is the same as what you have read in the past, stop reading.
  • Focus on stories about the future not the past. You are forward looking not backward looking.
  • Read to find the consensus not to drive your opinions.
  • Focus on the price data. Let the market prices speak to you. This is the weighted opinion of the markets.
  • Read from smart writers and read about what you do not know.

Trend-followers get it right by saying prices are primal. Quants get it right by focusing on the data and the probabilities. Those that can tell you all the details of yesterday’s news without a framework will get it wrong.

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