Bad news sells

20 July 2018

On Tuesday, 17 July, I read with much interest that the musical Grease was celebrating its 40th anniversary this year, with a much-touted reunion between its stars, John Travolta and Olivia Newton-John, in Los Angeles next month. When the movie was first released in 1978, renowned movie critics lambasted the movie – calling it “visual junk food” (Today Show), made “by nitwits who haven’t the faintest idea what a camera is” … that the music was “atrocious … Newton-John sounds like a tone-deaf cow and makes a screen debut that has all of the charisma of rancid buttermilk” (New York Daily News), and that it was a “klutzburger” (The New Yorker).

Yet, despite the stinging criticism, the movie brought in US$9.3 million on its opening weekend and spent the next 5 weeks at the top of the US box office. To date, the movie has grossed over US$400 million on its meagre budget of US$6 million, and remained the highest grossing movie musical until it was eclipsed after 30 years by “Mamma Mia!” in 2008. If you were an avid movie-goer in 1978, you might have skipped the movie based on the critical reviews by the so-called experts of the day. Yet they couldn’t have gotten it more wrong.

Similarly, in daily market news, there are generally more negative-sounding headlines e.g.”China stocks plunge on ‘Black Monday’” (17 Jul 2018, South China Morning Post) and “Private home sales slump adds to property gloom” (17 Jul 2018, The Straits Times) than positive ones. Why doesn’t the media run more good news?

Academic studies appear to confirm that the majority of negative news headlines are primarily due to the demand from readers. Individuals are more likely to select negative content regardless of their preferences for upbeat news. The research paper by Trussler and Soroka noted that the preference for negative information was likely subconscious, and readers usually find themselves selecting negative stories even as they state their preference for other types of information. The commercial media is thus encouraged to supply more of what their readers want, fuelling a self-generating cycle.

The data chart below shows how the media tends to play up the hype for “disastrous events”. Many of these diseases are nowhere near eradicated, and yet we hear nothing of them these days. Perhaps Zika has now become passé after being reported to death and after Singaporeans learnt that their babies were very unlikely to develop very small heads, unlike those afflicted in South America.

Reading the news for what it is – facts and information – is fine. The danger comes when the emotions generated by bad news prompt investors to make changes to their portfolios, unaware that this “bad” news has already been priced into the market.

It is thus a difficult, if not impossible, path for any investor who seeks to make investment decisions based on news. The assumption is, of course, that one must first be able to get the news ahead of everyone else, and then know how the market will react to that news. For many investors, that is nigh impossible, as many financial institutions pay big bucks to get priority access to news before the rest of the public does. Coupled with this are their armies of analysts and traders who man 24-hour trading desks, and computer algorithms designed by rocket scientists that are capable of digesting the minutiae of stock price movements and spitting out high-frequency trades in nanoseconds. What chance, then, does an ordinary investor have against such a vast arsenal?

Then again, can one really be sure about how markets will react to a particular piece of news? The example shown below on the world’s most followed stock (Apple Inc) shows that there is no definitive pattern that can be observed. For example, it has constantly been reporting positive earnings, and – except for the Jan 2015 announcement, which saw its share price spike – positive news didn’t push the price upwards. How does one explain that?

As media consumers, we are all entitled to our individual opinions on whether news is good or bad. As investors, acknowledge that market prices already reflect the diverse opinion of all market participants. To think that you can outsmart the market is akin to believing that you are the most intelligent investor in the world. So, maybe the more rational approach is to not fight the market, but to employ strategies that have been scientifically-proven to beat the market in the long run.

Just like what happened for Grease, the media, no matter how learned and talented, is not always right, nor has it the ability to definitively predict the future – be it the success of a movie or the state of the economy. So, don’t put your stock in news, and play the investing game on your own terms.

(Some excerpts of this article were taken from “Second-hand news” in Outside the Flags 5 (2017) by Jim Parker, Dimensional Fund Advisors.)

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