At the Money: Lose the Noise

A constant stream of noise distracts investors: earnings reports, news releases, upgrades, downgrades, economic data, geopolitics. How should we best manage this firehose of distractions? Larry Swedrow, head of financial and economic research at Buckingham Strategic Wealth, speaks with Barry Ritholtz about managing through the noise. His firm manages or advises on over 70 billion dollars in client assets. Swedrow has co-written 20 books on investing. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

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• 1:12Barry Ritholtz?

  I'm Barry Ritholtz, and on today's edition of At the Money, we're going to discuss noise. Not just any noise, but the kind of noise that distracts investors. Earnings reports, news releases, upgrades, downgrades, economic data, geopolitics, they can be a confusing swirl for long-term investors. How best to manage this fire hose of distractions? To help us unpack this and what it means for your portfolio, let's bring in Larry Swedro. He's Head of Financial and Economic Research at Buckingham Strategic Wealth. The firm manages or advises on over $70 billion in client assets, and Larry has written or co-written 20 books on investing.

• 1:58Barry Ritholtz?

  So let's start with our first Masters in Business interview we did years ago. You kind of stunned me by saying, "All of those news items are meaningless to long-term investors." Explain.

• 2:13Speaker 03

  Barry, the problem that investors fail to understand is that the market knows everything you know, and the minute news comes out, the market instantly adjusts to that new information, which is what is moving prices. And by the time you react, it's already too late, and you should therefore ignore the noise. A great example of that is, let's say, a company is trading at 60. This is a real example, and the earnings announcement comes out after the market. Stock earnings were up 100%.

• 2:54Speaker 03

  Now, a lot of investors would jump on that and say, gee, what a great earnings number. Well, don't it. First price, the next price it traded at was like 40. Why? Because the market was expecting more than 100% earnings, and therefore was disappointed. So the news itself is not relevant. News doesn't matter if it's good or bad. That's what investors make a mistake. All that matters is if it's better or worse than the market already expected. And if that's true, then the market moves, and now it adjusts, and again, it's too late to act. So you just want to have a plan that's well thought out and sit there.

• 3:39Speaker 03

  Give you one other great example from my book. General Motors, in the Great Recession, announced earnings were down 20%, and investors would think the stock should crash. Clearly, down 20% is a bad earnings number. In fact, the stock rose because the news, while bad, was not as bad as expected. The price went up, and it adjusted to that new information immediately. Researchers saw something like 95% of the move occurs, literally, in the first price, which today takes seconds, if that long, and then the move is over. You can see that anytime we get an economic news, the 10-year bond moves.

• 4:23Speaker 03

  Let's say five or six basis points and then it tends to sit there the rest of the day.

• 4:27Barry Ritholtz?

  So let's talk about economic news because it's not just the bigger ones like GDP. Every month, which comes GDP comes out quarterly, but every month we get non-farm payroll. And you flick on the TV on the first Friday of the month and in the corner of your screen is a countdown, literally counting down the seconds till non-farm payroll releases. It looks like it's a big deal. Everybody runs around and jumps up and down. I get the feeling you don't think non-farm payroll or GDP is all that important to what happens in equities.

• 5:01Speaker 03

  You know, I wouldn't put it that way. It clearly is important, but that doesn't mean you should do anything about it for the reasons we have discussed. Clearly, you know, whether the economy is doing better or worse than expected is going to affect stock prices. The problem is all of the evidence, there's not a single study I'm aware of that says anything different, that the odds of your being able to exploit this news by trading quickly on it, that means market timing. I mean, you know, there's very, very, very few people have been successful doing it. And one of the great ironies is people idolize Buffett and Peter Lynch and both of them

• 5:46Speaker 03

  told you never to try to time the market. And yet, people not only ignore their advice while idolizing them, they tend to do the very opposite. That's why I wrote the book, Think, Act, and Invest Like Buffett. Investing is simple, just act like Buffett, but that's very hard for the emotional reasons we've talked about. And the media plays on these fears and emotions. They know that people will react. They want you to tune in. That's how they make money, selling those commercials while you're watching. But that's not in your interest.

• 6:23Barry Ritholtz?

  So there's an endless array of other corporate news. Dividends, mergers, bond issuance, stock splits, acquisitions. What should an investor do in response to all of this breaking news on the corporate side?

• 6:39Speaker 03

  Literally nothing if you have a well-thought-out plan to make sure you've anticipated, you know, bear markets, recessions, black swans that could hit the market, making sure you don't take any more risk than you have the ability, the willingness, and need to take. Because if you do, when those black swan or negative events occur, you are likely to have problems driven by fear and you will panic and sell because your stomach will take over. And even if not, you're going to get so upset, you're going to lose sleep worrying, and life's too short not to enjoy it. So you're better off making sure your plan doesn't exceed your risk tolerance or your

• 7:24Speaker 03

  need to take risk. So you don't subject yourself to those emotional issues. And lastly, if you can't do it yourself, that's the biggest role of a financial advisor. Number one, get the plan right in the first place and then play Clint Eastwood as cop and say, you know, reminder, hold that six-gun to the guy's head and say, here, you signed that investment policy statement, go ahead and make my day.

• 7:52Barry Ritholtz?

  So lately, we've seen a big uptick in activist investors. What happens if you hold Disney, or Apple, or Tesla as part of your portfolio? What should you do when these activists come out of the woodwork and start agitating for change?

• 8:10Speaker 03

  I would suggest nothing because the market's already incorporated that information into prices. The smart guys like Buffett and Goldman Sachs and, you know, every one of these actively managed funds, they're already reacting to that news. And then their collective wisdom, the stock price is at that moment the best estimate of the future price. And again, if there was evidence that people could exploit it, where do we see it in persistent outperformance? Over 90% of the active managers underperform over the long term in every single asset class, and that's even before taxes.

• 8:52Barry Ritholtz?

  We're recording this, it's 2024, it's a big election year in the United States. We have two candidates, both of whom either are or have been president previously. People are forecasting a lot of turmoil around this election, maybe even some civil unrest. How should we adjust our portfolios for the big presidential election in November 2024?

• 9:16Speaker 03

  Again, I would urge that everything that you just told me is known by the market. That uncertainty is built in the market. Unless you've got a clear crystal ball about what's going to happen, and nobody does, then the best thing you can do is diversify. And the second thing is you want to make sure you do not let your political biases influence your investment decisions. There's actually good academic research that shows this. When the party you favor is in power, you get higher returns than when the party you favor is out of power.

• 9:55Speaker 03

  And the reason is, for example, in 2000, when we got hit by 911, the events had a big bear market. Well, if you were Republican, you were more likely to think that the Republicans would figure out what actions we would need to get out of it, and then therefore you were much less likely to panic and sell. And Republican investors outperformed Democratic investors during the Bush administration and in the Trump administration. However, the reverse was true. When Obama was president, we got hit with the 08 financial crisis, and Democratic investors would have had more confidence in his ability to maneuver out of it.

• 10:39Speaker 03

  They were more likely to stay the course, and therefore they were able to gain the rebound in the market. And the same thing is now true under Biden. So make sure you do not allow your political biases to impact your investments. If you're concerned about geopolitical risk, the best thing to do is build a highly diversified plan, so that can protect you, like buy insurance against having all your assets in the wrong basket.

• 11:11Barry Ritholtz?

  So earnings are key drivers of stock prices. How should investors respond to the just torrent of quarterly earnings that come out every three months?

• 11:21Speaker 03

  There is some evidence here to support the idea that when there are positive or negative earnings surprises, it is called the P factor, post earnings announcement drift, that because of momentum in stocks, which does exist, if you get a surprise on the upside, investors are slow to react a little bit, and the prices will tend to rise to some degree. Now, everyone who's an academic and practitioner with a MBA or PhD in finance and math, they already know this, so that evidence is shrinking. So my advice is you're probably best off just to ignore it and don't trade.

• 12:04Speaker 03

  But there is some evidence of that. So if you're thinking you're going to get out of a stock anyway, and you had a negative earning announcement, that might prod you to do it. And maybe you'll hold on a little longer if you're thinking, okay, I've got to rebalance and sell, maybe you do hang on a little longer.

• 12:23Barry Ritholtz?

  So to wrap up, investors who have a long-term time horizon should expect distractions along the way. But the data shows, whether it's economic data, geopolitics, quarterly earnings, analyst upgrades and downgrades, corporate news, none of us have any extra insight as to how those events will unfold and how they'll impact stock prices in the future. Your best bet? Stick with stocks for the long haul and ignore the noise. I'm Barry Ritholtz, and this is Bloomberg's At the Money.

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