Don’t let the media blowup your investment process

You’ve been asleep for five, six, maybe even eight hours if you’re lucky! One financial time zone has opened and closed while you’ve been in the land of nod. Something dramatic in the world might have happened that could affect your investments. You reach bleary eyed to your smartphone or switch on the TV. Just to check. Chances are though that nothing much has happened. The headlines from this morning probably won’t be important 17 hours later when you head back to bed.

But, that’s not what’s happened. The first headline you see makes you question one of your trades. Perhaps it wasn’t such a good idea anyway. In fact you begin to question why you were such an idiot for placing that trade. Before you’ve even had a chance to take a piss the cortisol levels are rising in your body. Right, that’s it I’m selling!

Your state of mind affects how you perceive the world around you. Too tired, too irritable and lacking time to think makes for a serious headwind to thinking critically. Starting the day with a dopamine hit of market randomness and media sensationalism is just the thing to knock your state of mind.

The media spends an overwhelming majority of time reporting on things like terrorism and murder — abrupt causes of death that dominate the air time even though their occurrence is (relatively) few and far between. Yet the leading causes of death are heart disease and cancer. These everyday killers are with us all of the time, in the background. They are not news. The relative lack of attention may also be due to the longer time frames that these illnesses often take to play out.

A similar attention-deficit dynamic exists in the financial media, where the leading drivers of portfolio health (durable long-term returns) are often the least likely thing to be covered by the financial media. Those factors which affect long term returns are not news. For want of a better word they could be a bit, well…boring.

One of the hardest things about getting your financial news via Twitter is time. The time required to sift through and ignore the stuff that may be negative in the short term, but don’t really affect your investments in the long term. For example, if someone is a short term trader they may post why they are negative gold over the next few weeks, but that really shouldn’t bother you if you are planning to be long on the metal for several years.

How to be a smarter financial media consumer?

- The most important financial news and analysis is rare: The most important financial media content includes news and analysis that requires you to take immediate action. This should be extremely rare. Remember, the person producing the content doesn’t know you personally, or your portfolio. The second most important type of content changes how you think about an important topic.

- Be a financial news historian: It will teach you that the vast majority of headlines were not that important, and so not worth worrying about in the context of the time period important to you. It will also teach you that understanding headlines and their propensity to extrapolate trends can sometimes be an important indicator of a trend reversal.

- Consume financial media content that you disagree with, by people that you respect: The plethora of media channels available make it very hard to seek out alternative viewpoints. Seeking out well-structured arguments, even if you disagree with them enables you to gain a better understanding of the financial world that we live in.

- Imitate Ulysses — Investors should take the necessary steps to focus on the time horizon that is relevant to them. If a trade is based on your outlook over the next week then worrying about opinions in the media on the outlook over the next decade are useless; vice versa if you are focused on the long term.

By imitating Ulysses (whose crew bound him to the mast of his ship to protect him from the call of the Sirens), you could take steps to only be exposed to financial news relevant for the time period you are most concerned about. If that doesn’t work follow the example of Ulysses crew and put wax in your ears!

If you find yourself disagreeing with someone’s opinion over the future direction of a particular financial asset, ask yourself whether they are playing a different time horizon to you.

- Use the common knowledge game to understand narratives: Investors need to understand the underlying fundamentals of course, but what is even more important is that they also understand how narratives influence other investor’s behaviour. Always ask the question whether the narrative is now common knowledge, i.e. has it been ingrained into the investment process of other market participants?

-Be intentional about your financial news media process: Allocate a certain time of the day to review the news. Whatever you do don’t have news headlines popping up in real time or otherwise you will let that news define your process. Use a service like Pocket to save the best articles to read later.

Peter Sainsbury is the author of Pay Attention: 101 Ways To Tame The Narrative Machine, Be A Smarter Media Consumer And Stop Outsourcing Your Thinking

I write about commodity markets at www.materials-risk.com. Author of a book about the power of media narratives and reclaiming your thinking.

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