All the news isn't bad

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
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larryswedroe
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All the news isn't bad

Post by larryswedroe »

with all the negative news in market thought it would be helpful to also point out some of the positive things that seem to be ignored by most people I talk to
http://www.cbsnews.com/8301-505123_162 ... ortfolio/?

Hope this is helpful

Larry
garlandwhizzer
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Re: All the news isn't bad

Post by garlandwhizzer »

Excellent post, Larry. Thanks for adding some perspective to the avalanche of worrisome news.

Garland Whizzer
Fallible
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Re: All the news isn't bad

Post by Fallible »

Thanks for providing always-needed perspective and for reminding us (again!) that the bad news has already been priced into the market. What seems different this time (and it always seems different each time) is how global the bad news is. So when you say bad news sells more than good news, I'm beginning to think good news may soon outsell bad. (Media: take note.)
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
Topic Author
larryswedroe
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Re: All the news isn't bad

Post by larryswedroe »

One thing I would add is that hindsight bias can create real problems--it causes us to think that even things that hardly anyone predicted were painfully obvious. So if the left tail risks does show up, many will be thinking that it was painfully obvious, and that will lead to reacting to the noise the next time

Best wishes
Larry
gofigure
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Re: All the news isn't bad

Post by gofigure »

Thanks Larry...this thread is why I visited the forum today. At 55 and 57 resp... to me and the Mrs., market conditions aren't inspiring much confidence lately... Pip Pip...stiff upper lip ...and all that... or like someone once famously said... "Don't do something....Just stand there"
Topic Author
larryswedroe
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Re: All the news isn't bad

Post by larryswedroe »

gofigure
It can be hard to hear that the best course of action during tough market times is to stay the course. Keeping your head while everyone else around you is losing theirs is difficult. It can be even harder to hear that message repeatedly as things go from bad to worse. However, the message to stay the course is worth repeating because it is the best advice. Because there is no evidence that there are good forecasters, efforts to time the market are highly unlikely to prove productive

Best wishes
Larry
Leesbro63
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Re: All the news isn't bad

Post by Leesbro63 »

Thanks Larry for the good article and good follow up comments here.
ge1
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Re: All the news isn't bad

Post by ge1 »

Larry - thanks for the link as always.

I do find the argument that all news is already priced in the market too simplistic though. Take the current situation: The US stock market is holding up pretty well with the S&P up 4-5% this year (I think). In my view the main reason for this relatively strong performance is the fact that people are expecting the Fed to step in eventually with QE3 which should give stocks a boost in the short term. This may turn out to be correct in the short term, however mid- to longterm all these Fed interventions may not achieve much at all.

I don't want to turn this into a political discussion, so I guess my main point is if short term traders (which by far account for most of the activity in the market) agree on a correct short term price, this may very different from the correct long term price for a long term boglehead investor.
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larryswedroe
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Re: All the news isn't bad

Post by larryswedroe »

ge1

Glad you found it helpful
Here is the way I think about it:

I believe that the market does incorporate all that is knowable, though sometimes the market gets mispriced because of high investor sentiment (that's how bubbles happen) and limits to arbitrage prevent arbs from correcting. But we are not in such a period of high investor sentiment. All you are saying is the market is wrong, in your opinion. They are pricing in the likelihood of Fed action--which might be correct, but you think they are overstating the odds (at least that is way I read it). But markets should be forward looking, putting odds on things.

BTW-there are now a whole series of interesting papers on the issue of investor sentiment and anomalies. I have written several blog posts, one has already appeared, but more to come.
IMO they really help to explain how anomalies can happen and why they can persist even after publication of the findings.



Best wishes
Larry
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ruralavalon
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Re: All the news isn't bad

Post by ruralavalon »

Thanks for the link, and for pointing out that there is some important good news out there:
1. historically low valuations;
2. U.S. corporate profits up;
3. up tick in domestic energy production;
4. some jobs previously outsourced offshore returning;
5. drop in some commodity prices;
etc.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
ge1
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Re: All the news isn't bad

Post by ge1 »

Larry
I would have to think this through more but I guess I'm saying that that the prices in the stock market are set based on a very short time horizon. People think stocks maybe higher in 1 or 3 months and they buy. Or they think they go lower in a few weeks and they sell. If that's true, wouldn't that be an issue for somebody with a longterm horizon?

Let's take the example of the JP Morgan trading loss: A 2 or 3bn trading loss causes a reduction of 20bn in market cap (don't have the exact figures available). Why would that be? If you view the correct price of JP Morgan shares as the sum of the discounted future cash flows, a 2-3 bn current year trading loss should barely have an impact.
Topic Author
larryswedroe
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Re: All the news isn't bad

Post by larryswedroe »

ge1
Try this, the market knows that because of the trading loss the rating agencies would view JPM as much more risky and downgrade JPM --that would have lead to not only significant increases in funding costs, but it will also impact their ability to do business where credit ratings are important (like derivatives). In fact, there are businesses they may no longer even be able to compete in. The market pulls the present value of the discounted cash flow impact forward and repriced the stock for the long term. There are actually studies on issues like insurance company losses from hurricanes and they find that market prices them accurately
Best wishes
Larry
bigH
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Re: All the news isn't bad

Post by bigH »

larryswedroe wrote:with all the negative news in market thought it would be helpful to also point out some of the positive things that seem to be ignored by most people I talk to
http://www.cbsnews.com/8301-505123_162 ... ortfolio/?

Hope this is helpful

Larry
But positive or rosy news does not sell news as well as crisis news. What jobs will the talking heads then get?
gofigure
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Re: All the news isn't bad

Post by gofigure »

Just someone's opinion perhpas ...but nonetheless potentially another bit of good news on the horizon....

http://www.nytimes.com/2012/06/27/busin ... ro.html?hp
Topic Author
larryswedroe
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Re: All the news isn't bad

Post by larryswedroe »

ge1
Here is another important point, actually the most important, that IMO you missed on JPM. The huge loss demonstrated to investors that they had OVERESTIMATED JPM's ability to manage risk. Thus, they recognized that the stock was more risky than they thought and they raised the discount rate at which future expected earnings --and that is what caused the much larger loss in valuation than the simple loss---plus the other issues I raised

I hope that is helpful

Best wishes
Larry
Howard Donnelly
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Re: All the news isn't bad

Post by Howard Donnelly »

Excellent article. Thank you for posting it.
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