Login

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.)

#

If you have found this article useful and would like to schedule a complimentary session with one of our advisers, you can click the button below or email us at customercare@gyc.com.sg.

Go back to homepage

IMPORTANT NOTES: All rights reserved. The above article or post is strictly for information purposes and should not be construed as an offer or solicitation to deal in any product offered by GYC Financial Advisory. The above information or any portion thereof should not be reproduced, published, or used in any manner without the prior written consent of GYC. You may forward or share the link to the article or post to other persons using the share buttons above. Any projections, simulations or other forward-looking statements regarding future events or performance of the financial markets are not necessarily indicative of, and may differ from, actual events or results. Neither is past performance necessarily indicative of future performance. All forms of trading and investments carry risks, including losing your investment capital. You may wish to seek advice from a financial adviser before making a commitment to invest in any investment product. In the event you choose not to seek advice from a financial adviser, you should consider whether the investment product is suitable for you. Accordingly, neither GYC nor any of our directors, employees or Representatives can accept any liability whatsoever for any loss, whether direct or indirect, or consequential loss, that may arise from the use of information or opinions provided.

GYC Perspectives

Markets are often irrational. Even among experts, forecasting does not consistently work. We instead believe in Evidence-Based Investing (EBI), which uses decades of empirical data and the greatest ideas in financial science to optimise investment outcomes. No market predictions, no forecasts, no emotions. All those things rely on gut-feel and intuition that cannot be consistently replicated.

Here, we share with you the evidence on why EBI works and why forecasting doesn't, as well as articles on topics such as behavioural finance to help you become better investors. New here? You can start with this introduction to EBI. Happy reading!

© 2017-20 GYC Financial Advisory Pte Ltd | Co Reg No 199806191K