It seems every time you open a newspaper, you’re bombarded with the often competing views of equity analysts, economists and other pundits about the right level for stocks, the likely winning and losing sectors and what policy changes might mean for the market.
When it comes to the outlook for companies and sectors there is no shortage of opinions. And that’s no surprise, really. Look at the sheer number of variables involved, like industry position, regulation, management quality, gearing, margins, product. It goes on forever.
The traditional view is that to be successful as an investor, you should be poring over the papers every day, finding the opinions that seem to make the most sense and then building your investment portfolio from what those likely winning pundits say.
Now, while a few brave souls with plenty of time on their hands love this kind of challenge, the truth is that most of us have better things to do than reading the tea leaves every day. In any case, it’s not necessary. That’s because today’s market prices already reflect the collective views of all the experts and economists and brokers and other pundits.
Markets work by incorporating all the information and analysis and views of willing buyers and sellers into prices. This happens every minute of every trading session of every day all around the world. What’s more, those prices are forever changing as new information comes into the market – a profit downgrade, a regulatory change, a technological innovation.
What this means for the average investor is that by the time you read all the sage analysis about different companies and sectors in the media, it’s usually out of date. That information, while not wrong, is already reflected in prices.
Even the best companies – those well managed, with strong balance sheets and superior products - can be negatively affected by events entirely out of their control. We have seen evidence of that most vividly in the past year with COVID-19.
Of course, this can work out positively as well as negatively. A technological breakthrough can turn a previously speculative stock into a rock solid growth opportunity. Or changing consumer tastes and preferences can bring a neglected stock back out of the shade.
But trying to predict these things is pointless because it involves you predicting the news. And even if you did all the homework – read the press, pored over annual reports, got to know the various analysts on first name terms – there’s still no guarantee you’d get it right.
Yes, the odd person does strike it rich by betting against the market or guessing about a development that nobody else had considered. But that’s like going to the casino. The house will win most of the time and you’re really just throwing the dice.
There is simply little evidence that investing by outguessing market prices is a consistent way of adding value over the long term. And even if the odd stock pick came off, there’s still the question of whether your bet is sufficient to cover all the costs of your research.
And there’s another risk here. Even if you pick a few winners in a concentrated portfolio build around stocks you think are mispriced, you also risk missing out on even bigger gains in the ones you haven’t picked.
An Easier Way
Fortunately, there is an easier way. It starts with accepting that today’s prices, while doubtless imperfect, are as fair an estimate as you’ll get on a company’s prospects. That’s because today’s prices already reflect everybody’s opinions, good and bad.
Then, if you diversify across different stocks and sectors and countries, you’ll be less subject to idiosyncratic risks that can blow up your portfolio. And you’re not asking a handful of your best ideas to do all the work.
The financial news can be interesting, no doubt. And it’s good to stay informed. But it’s not the basis for a forward-looking investment strategy. That’s because ‘news’ is about what’s already happened, what’s already reflected in prices.
Instead of trying to second guess those prices, you could make your first step just accepting them as the market’s best estimate of future returns and then build your portfolio around them, without trying to time the market or bet against it.
By using the information that’s in prices and diversifying as much as possible, you’re increasing your chances of success. And you can then spend your spare time fishing or listening to music or dining out with friends instead of worrying your way through the newspaper every day.
It's called getting a life.