Turn Off, Tune Out, Get Rich

This week I want to talk about the amount of noise that exists in the financial media and how you would be far better off as an investor if you ignored it. The idea here is that by consuming financial media you are going to be more susceptible to psychological changes that harm your long term investment returns. In others words, you will panic and you will sell.

To start this discussion, I am going to bring forth the analogy of Mr. Market, a metaphorical figure created by the legendary value investor Benjamin Graham. Paraphrased from Graham’s book, The Intelligent Investor:

Imagine that in some private business you own a share that cost you $1,000. One of your partners, named Mr. Market, tells you what he thinks your share is worth and furthermore offers either to buy out or to sell you an additional share on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or fears run away with him, and the value he proposes seems to you a little short of silly.

Will you let Mr. Market’s daily communication determine your view of the value of your $1,000 share in the enterprise?

You face the same predicament as the one above EVERY. SINGLE. DAY. while you are invested in the stock market. Throughout the week you are constantly being presented with a price and have to decide whether to buy shares, sell shares, or hold on to what you have.

The problem with the market, and financial media generally, is the amount of noise that comes out on a daily basis. I cannot tell you how many times I have seen a headline like, “Stocks up/down after [insert event here].” Almost all of these events will have little to no impact on the trends underlying the stock market’s long term growth, yet long term growth prospects are nowhere to be found in the reporting. It gets even more entertaining when a news outlet explains why stocks are “up” in the morning to then later point out why they are “down” in the afternoon. And sometimes these market shifts are explained using the same event.

What I have come to realize is that the financial media isn’t really for investors, but for traders. The financial outlets won’t tell you that though. Noise means something to a trader, but to an investor it should be promptly ignored. It is understandable why the financial media behaves this way though. They need to create this sense of dread for their viewers to keep reading and watching. It is better for their business model. More eyeballs = more ad $$.

If I had my own investing show it would last all of 20 minutes one time. In those 20 minutes I could provide the core principles that would guide you through most of your investment life. For everything else more personal/complex, see a financial planner.

With that being said, rather than just talking about noise in the financial markets, let’s look at some data. Using 1-year real U.S. stock and bond returns, the noise in the market looks something like this:

S&P 500 and US bond annualized real returns over 1-year periods from the mid 1920s to the late 2010s.

Over 1 year periods, markets can be very chaotic for both U.S. bonds and U.S. stocks. This is also true over shorter time horizons (i.e. monthly, daily, intra-day, etc.). However, the chaos fades as the time horizon increases. Below is an animation I created that shows the S&P 500 and U.S. 10-year Bond returns as they vary from a 1-year horizon to a 30-year horizon. What you will notice is that over longer time horizons, the trends of society play out and all of the noise falls away. Start watching at the “1-Year Period” chart and you will see this process in action:

S&P 500 and US bond annualized real returns over various holding periods from the mid 1920s to the late 2010s.

As the return period increases, we are witnessing changes in productivity, technology, business organization, and much more. These are the true drivers of wealth creation and the things that one should focus on as an investor. As I have stated previously, there are always many reasons to sell. There will always be noise implying that you should get out, that this time it’s different, and that the world will really end. However, it probably won’t.

Escape the Quicksand

Watching financial news is akin to being caught in quicksand. The more you watch, the more likely you are to react to short term events and do something that could lose you money. Remember, you only lose money when you sell. And you are more likely to sell during a panic when a news outlet is flashing turmoil across your screen. This is not an analytical argument, but a psychological one. Even Sir Isaac Newton lost a small fortune in the South Sea Bubble of 1720, despite being one of the smartest people to ever live. Newton later remarked something along the lines of:

I can calculate the motion of heavenly bodies, but not the madness of men.

So turn off, tune out, and get rich. Don’t consume too much financial media (including this blog). When it comes to investing, Jack Bogle, the founder of Vanguard, gave some of the best advice I have ever heard:

Don’t just do something, stand there!

Thank you for reading!

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This is post 33. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data

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