News or Noise?

If you watch financial television, or read the latest financial news, you’ve likely been inundated with stories about the potential market implications of recent geopolitical events. On Thursday, a Malaysian jetliner went down in the Ukraine. This was just the latest news related to the region’s turmoil. The event likely drove Thursday’s decline in the major stock market indexes. News of renewed conflict in the Gaza Strip and the ongoing issues in Iraq may also be reasons the market moved lower. In addition, there are concerns that oil prices could surge if Middle East tensions escalate.

However, if we held all the market pundits and forecasters accountable for their past predictions, we would find their track records to be substandard.  Should we, then, rely on them now to correctly forecast what the current events may mean for the markets or investors? Ponder the following questions:

  • Has a pundit ever correctly identified a bubble as it was happening?
  • Has the general public ever had the correct perspective on the market’s valuation?
  • What is mainstream media’s track record when it comes to issuing a timely warning that a recession is imminent?

There were a few astute individuals that realized the housing market was overvalued in the mid-2000s and were able to profit from it. But they generally kept this view out of the mainstream. Moreover, they came to understand the market’s mistake through their own research efforts and not through the mainstream media. It is unlikely you can find anyone that predicted oil prices would peak at nearly $150 in 2008, bottom out in the low-to-mid $30s in 2009 and move back over $100 as early as 2011. Even if someone did correctly identify any of these events or could predict the next one, there really is no way of knowing with certainty what it means for the markets or investors.

BWFA Investment Approach

At BWFA, we pay attention to geopolitical events. We include them in our regular investment committee discussions about the market. We think about what their implications might be. In the end, given our long-term positive view of the markets, we will rarely, if ever, take immediate or dramatic action because of geopolitical events. In short, we view them primarily as interesting noise. We readily admit that we have no idea of what will really happen. We view ourselves as investors rather than speculators or market timers. We prefer to see if such events give rise to opportunity. Oftentimes, all stocks in a particular industry or sector will fall in response to the external environment. This can give us the opportunity to acquire (or increase our interest in) good companies at even better prices.