There is no finer example of humans’ herd mentality than listening to, and acting upon, the tidbits of the financial news media. As was commented recently, what if you left the design of elevator buttons to these folks in the media? Instead of “UP and “DOWN” buttons, wouldn’t they make them read, “SOAR!” and “PLUNGE!”? The media types exaggerate to create intrigue and interest for unsuspecting viewers and listeners.
The more enlightened among us have recognized how toxic the news media can be—there are studies that show how the continuous focus on the news can do harm to our bodies. An additional point to consider is how the news shapes our thoughts about the world and, in the case of financial news, causes investors to do harmful things to their financial lives.
Our brains crave stories that somehow validate our prior conclusions, whether right or wrong. The daily news many consume explains outcomes in a rather frivolous and superficial way, feeding into the flawed way in which our brains function. It might be better to think creatively—concentrating for longer periods of time—to achieve productive outcomes. As an investor, you can lose a lot of money chasing headlines or timing the market, and the best advice is usually to do nothing.
Here are some examples from recent market history, where overreacting to “quick” financial news led investors in the wrong direction:
- Investing in the “one decision” stocks, like the “Nifty Fifty” Blue-chip stocks of the 1960-70s—where you just bought a big-name company, without regard for underlying valuations, doing so at potentially the wrong time, exposing yourself to financial peril
- Investing in the technology stocks in the 1990s—again, not based on solid investment fundamentals but on the herd mentality of the day
- Purchasing a house with little or no money down because home prices “will never go down”
- Heeding doomsday predictions regarding Donald Trump’s victory in the last presidential election
Even today, there are still other, current potential lessons to consider. We do not want to react thoughtlessly just because we hear touting in the media, for example;
- Passive investing—where investors are urged to just “buy the market” and it will be easy to make money without professional analysis as to the benefits of the investment
- Investing in bonds for safety, or in retirement, without fully considering the negative effects on investment results from an impending potential bear market in bonds
When you feel a sense of panic or urge to react, remember that our brains do funny things given these short bursts of stimuli and likewise remember that the media do not report their news for the purposes of making you money.
BWFA’s focus is on creating a long term, thoughtful plan based on sound judgement and research, often running the other way from the herd, in order to assist clients in achieving their financial plans.
Joseph Manfredi | MBA | Chief Operating Officer / Senior Portfolio Manager | firstname.lastname@example.org