This post was originally published on this site
One of the most effective investment strategies for dealing with the news media’s drumbeat of crisis-obsessed reporting is to ignore it.
That’s not easy to do. It’s the functional equivalent of telling a child entering a festival to avoid the carnival barker who’s yelling and jumping up and down. But recent research has come up with compelling reasons why you should nevertheless try to follow it: The most undervalued investments tend to be those that receive the least attention in the financial press.
The provocative implication: That which the financial news is not writing about is likely to be a better bet than that which the news media is focusing on—even when the news is bad. Keeping this in mind goes a long ways to help you cultivate a detached attitude toward whatever is dominating the news cycle.
To refer to just one recent example: On March 8, crude oil jumped to an all-time high of nearly $124 a barrel, nearly double where it stood in early December. On March 9, the very next day, its price plunged by nearly $15—one of the biggest daily price drops in crude oil’s history. Not surprisingly, the daily investing news summaries for both days paid a lot of attention to oil-and-gas industry stocks, which dominated the list of March 8’s biggest gainers, and equally dominated the next day’s list of biggest losers.
According to this new research, this likely means that oil and gas stocks are not good bets.
In contrast, stocks like Healthpeak Properties
PEAK,
another stock in the S&P 500
SPX,
tend not to be very volatile. Boring, you might say. Its share price fell all of 3 cents on March 8 and rose 10 cents on March 9. In fact, when entering in the stock’s ticker on The Wall Street Journal website, you discover that there has been “no significant news for PEAK in the past two years.” The new research finds that boring stocks like Healthpeak Properties are better long-term bets than the oil and gas stocks that have been in the news.
The new study that reported these findings, entitled “Daily Winners and Losers,” was conducted by Alok Kumar of the University of Miami, Stefan Ruenzi of the University of Mannheim in Germany, and Michael Ungeheuerd of Aalto University in Finland. The researchers found that the very fact of media attention on a stock, industry or sector causes it to be less of a good bet. In other words, that which gets the most attention proceeds to underperform that which gets the least attention—on average. To beat the market over time, we should focus on what the news media is not writing about.
The researchers arrived at their conclusion by constructing two portfolios. The first contained stocks that, like Healthpeak Properties, received next to no media attention over the prior month. The second contained the handful of stocks over that prior month received the most attention—both good and bad, favorable and unfavorable. From 1963 to 2015, the first portfolio beat the second by an average of 10% a year.
For those of you who remember your Physics 101 class, you can think of this finding as the investment equivalent of the Observer Effect. According to it, the very act of measuring something alters it. In the financial arena, the very act of paying attention to an investment affects its valuation.
Stop paying attention to your portfolio’s short-term gyrations, too
This new research reinforces a conclusion of a Federal Reserve working paper in 2017: “The Display of Information and Household Investment Behavior.” That study, which I have written about before, analyzed what happened after Israel in 2010 implemented a new regulation preventing mutual funds from reporting returns over any period shorter than 12 months. Before the change, mutual fund statements reported returns over shorter time periods as well, with the result that the funds had appeared to be quite volatile. After the change, investors’ perceived the funds to be significantly less volatile—and therefore less risky.
As one might expect, these changed perceptions had a significant effect on investor behavior: It “caused reduction in fund flow sensitivity to past returns, decline in trade volume, and increased asset allocation to riskier funds.”
When it comes to investors’ use of social media, 2010 is ancient history, of course. Whereas the typical investor then might have checked his portfolio’s value on a weekly or even a monthly basis, he now checks it several times in a given trading session. As a result, he perceives the stock market to be riskier today than then, and on average has less allocated to equities as a result. His long-term performance will suffer as a result.
The bottom line? The implication of both the older study as well as this new research is that those who ignore the markets perform better than those who don’t.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
