Discover the relationship between media headlines and the response of investment markets. It may surprise you.
The Media Can Be Helpful, But it Isn't Necessarily Your Friend
'IF IT BLEEDS, IT LEADS' is the mantra of many news editors. In other words, bad news attracts more readers / viewers, which is why we are constantly bombarded with depressing headlines.
The challenge arises when many of us rely on the media to give us a sense of where investment markets might be heading. Relying on the media to guide our investment decisions is potentially a mistake; news, especially bad news, can unnecessarily rattle and mislead the unwary. The investment markets simply don’t track the headlines in the way we intuitively and emotionally assume they will. As a result, too many retail investors take corrective action, when they could simply do nothing and ultimately be better-off.
Professional and savvy investors don’t fall into this trap. It isn’t that the news is irrelevant to professional investors, but to them today’s headlines are already history, and they are focused on tomorrow’s market returns. Savvy investors are focused on the true value of any asset, which lies in the present value of its future cashflows, those accruing to the asset owner.
Table 1 shows how historically markets consistently go up, whatever the crisis du jour. In fact, from 1945 through 2020, the S&P 500 went up 79% of the time, despite some very alarming events. Yet most investors dismiss this logic and instead act on emotion, which can result in portfolio disaster.
Table 1: Year End S&P 500 Total Nominal Returns in US$ vs USA Media Headlines 1945 - 2020
Source: Slickcharts (bit.ly/2MYauT7) and Refinitiv
During the Greek debt crisis of 2011, many in the media were warning US readers of impending international financial doom. They could have been right, but then again journalists rarely pointed out the size of the Greek economy is barely that of the US State of Maryland’s, therefore Greek’s potential default was not going to have a major impact on the S&P 500. It’s important to separate hype from reality.
I have listed the S&P 500 first because it is a larger and more vibrant index than the FTSE All Share, and the differences between actual investment market performance and the many scary media headlines is more pronounced.
However, and similar to the S&P 500 returns, Table 2 illustrates how the FTSE All Share relates to UK headlines. Yet again, the same pattern holds true.
Table 2: Year End FTSE All Share Total Nominal Returns in £ vs UK Media Headlines 1965 - 2020
Source: Refinitiv
The FTSE All Share returned a positive performance 70% of the time over a 56 year period despite some seriously unpleasant news.
The eagle-eyed amongst you will also note 2020 saw the S&P 500 rise by 18% year-on-year despite the devastation of Covid-19. Whereas the FTSE All Share fell just over 12% from the end of 2019 to the end of 2020. Both markets had fallen dramatically in March 2020, the FTSE All Share by -36% and the S&P 500 by -31%. So why the difference?
In this instance the answer lies in the different composition and type of companies in the two indexes. Technology firms have generally profited from Covid, and this has boosted the US stock markets where technology stocks account for nearly 30% of the S&P 500 capital index. Meanwhile, the financial and energy sectors, which comprise a fair chunk of the UK stock market, were hit hard by Covid. The relative performance of the UK vs US markets in 2020 is therefore accounted for by their constituent parts, not by some of the weird and whacky theories promoted in the media.
Here's a fun image from Visual Capitalist that tells its own story:
Source: Visual Capitalist
Remember, the media doesn’t just encompass periodicals and TV/Radio; it increasingly includes newsletters, the internet, podcasts, blogs, vlogs and social media. So ignore the soothsayers, the doom-mongers and psychics – predicting the future is nigh impossible.
There is no greater cause of mischief to the small investor than the confusion between the health of the economy and stock returns. It’s natural for people to assume that when the economy is in good shape, future stock returns will be high, and visa versa.
The exact opposite is true: market history shows that when there’s economic blue sky, future returns are low, and when the economy is on the skids, future returns are high; it is a truism in the market that the best fishing is done in the most stormy waters.
William J. Bernstein, Financial Theorist and Neurologist
Beware The Top Ten
At some point all financial media will publish a list of their ‘Top 10’ investment funds. Fine, but do not be overly impressed.
Most of the funds recommended will be expensive actively managed funds; they provide a more interesting narrative than a boring index tracker. Some of those funds recommended will have demonstrated spectacular recent performance. As you peruse the list just remember the following:
Performance numbers are often given before investment costs are deducted.
Reported performance will be expressed in nominal, not real, returns.
Fund outcomes will not be compared against risk-adjusted returns.
Rarely will an appropriate benchmark – if any – be given by way of comparison.
Past performance is no indicator of future success.
There are over 9,000 mutual funds in USA and more than 2,000 in the UK. Pure chance dictates some cannot but help outperform the market, even by a wide margin. That doesn’t mean to say they’re any good.
Try to resist the deceptive appeal of such lists. I take the view active funds are best deployed as selective satellite funds within a portfolio comprised of core index funds. The focus of these active funds would, if carefully chosen, be designed to reach specific sectors of the market that passive investing does not track, and thereby add valued diversification.
What’s more, active fund managers have a tough job. Not only do they have to overcome the extra costs and trading charges, but if successful with their initial fund selections, sometimes referred to as their ‘conviction holdings’, they then receive large inflows of new money for which they have to find new investment opportunities. These new cash inflows force the fund manager to seek shares about which they have less conviction, and thus their initial outperformance is difficult to sustain.
An interesting article by Occam Investing on the nature of UK passive vs active funds can be found here (bit.ly/31DCt1D).
Reporting Performance
The media derives much of its advertising revenues from the financial sector. It does not therefore bite the hand that feeds it. Fair enough.
However, problems start to surface when, in order to please its advertising clients, it is obliged to hoodwink its readers. Yet again, you need to be cautious if you're reading about a fund’s performance in the media. Here’s why:
Table 3: Reporting fund performance
Table 3 shows the performance of an imaginary fund during a moderate bull market. The media might say the following, which is correct based on the above illustration:
Since starting, this fund has on average returned nearly 9% per year to investors.
In four of the last five years this fund has produced a positive return to investors.
Although the fund was only worth £17m five years ago, it is now worth £174m, ten times as much!
Neither the media, and certainly not the fund itself, will tell you the following is also true based on the exact same data:
Investors have placed £176m into this fund over the past 5 years. The fund is now worth £174m.
The average annual return of this fund is 0%; in other words, the fund did not make any money over the past 5 years.
Assuming all invested an equal amount, 65% of investors in this fund have lost money.
If you read only the first three statements you’d think you were onto a winner. It isn’t.
It’s disheartening, but while the financial press pretends to be our friend, too often they are anything but. Your best protection is to treat media coverage of the financial industry and their offerings with a dose of salt.
[An explanation for the conclusions behind the second – and more accurate – interpretation of this fund’s performance can be found at the bottom of the blog].
Social Media
The many channels of social media are useful sources of information and are frequently used to guide investment decisions. This may improve market efficiency, yet it may also provide malicious actors with opportunities for disinformation, disruption and profiteering.
Despite the benefits, social media makes it easy for influencers with limited investment knowledge to share their trading and personal finance opinions. Indeed, many are trying to monetise their non-existent expertise by duping viewers to subscribe to specific trading strategies and platforms. Please be very careful, and always do your homework before buying into an online influencer.
The Guardian has written an informative piece on ‘finfluencers’, it is available here (bit.ly/3lNhtMR).
The Good News
Having said all that, over the last few years an increasing number of journalists, their editors and bloggers have begun to champion the needs of the consumer while challenging the nefarious behaviours of the financial sector and misleading media. I salute them – we need more of them.
For a list of outstanding bloggers and websites worth visiting and following, please download MYFE Book 1 and review the ‘Additional Resources’ section on pages 76 to 83. Here you will find some of the best and most experienced and reliable information in the land.
Takeaway
Don’t despair at depressing headlines. Avoid listening to the daily noise coming from the media and markets. Do your own homework; think about the possible motivations of those spreading the news, don’t believe all you read / hear / watch, and think carefully about the underlying so-called facts. Remember, a realistic sense of history, perspective and context make all the difference when assessing investment market performance.
Reporting Fund Performance – the numbers behind the table:
The average annual return of this fund is 0%; the fund did not make any money over the 5 year period.
Investors have placed £176m into this fund over the past 5 years. The fund is now worth £174m.
Investors put £176m into the fund (£17m in year 1, £51m in year 2, £56m in year 3, £7m in year 4 and £45m in year 5… 17+51+56+7+45 = 176).
It is now worth £174m (see bottom right of the table).
Therefore, as the total amount put into the fund (£176m) is approximately the same as the end value (£174m), the average annual return is 0% (in fact, it’s slightly below 0%). The point is that the total value of the fund is more or less exactly equal to the total amount investors put in, and thus over 5 years the fund itself hasn’t created any returns overall, i.e. the average annual return is 0%.
Assuming all invested an equal amount, 65% of investors in this fund have lost money.
Here’s the maths:
Spreadsheet explanation:
The £17m invested in year one, returned 10% i.e. £1.7m in year one, and was thus worth £18.7m at the end of year one.
This £18.7m then returned 4%, i.e. £0.748m, or £748,000 in year two, and was thus worth £18.7m + £0.748m = £19,448,000 at the end of year two.
By the end of year 5, this initial £17m invested was worth £18,145,762, and thus this group made money on their investment.
However, by the same logic, all those who invested in years 2 - 4 actually ended up with less money at the end of year 5 than they initially put in.
Hence, as it is assumed the same number of people invested in the fund each year three-fifths of those investors lost money, i.e. ended up with less money than they initially invested.