The Sound of the Market
“A point of view can be a dangerous luxury when substituted for insight and understanding.” – Marshall McLuhan
So you’re a DIY kind of person. You change your own oil, you paint your own deck, and then every once in a while, you have to call your buddy, who just happens to be a general contractor, to come and fix your mistakes. Investing is probably something you want to approach with this same DIY strategy. A lot of people would advise you against this because there is a lot of information to understand and a lot of work involved in picking safe investments. I don’t blame you though because that’s how I approached it, I was just incredibly lucky to find it interesting and felt a need to pursue it as a career. I’m a DIY guy by nature, I find a lot of value in learning how to do things on my own so that way I don’t have to rely on someone else to teach me how to do it. Deep down I know that classical economics dictates that I should just pay someone to do the things that I’m already bad at and focus on what I’m good at, but there’s just something satisfying about learning how to do a new thing.
So, if you need to do something simple, most of you can probably find a YouTube video out there about how to do it. The nice thing about changing a mirror on a car for instance is that for your specific situation, there is usually only one video for the make and model of your car, and one way describing how to do it.
This is entirely not how finding advice about investing works.
There are a hundred thousand different websites, articles, blogs, books, advisors, talking heads, newspapers, as well as everyone’s friend who’s always got “great stock picks”. How do you figure out what’s valuable and what isn’t? Well, here’s how I’ve been thinking about learning about the markets lately.
These are the most useful tools you have in the financial markets, in this order.
I’ve been focusing on learning about the market through three difference avenues. Books, articles, and news stories are the only things I focus on (oh and of course class). This may sound pretty obvious, but I think there’s some value in how to think about these avenues. So books are great; books convey broad and complex topics that usually require weeks to digest. They develop long-term and enduring understandings about how the market works. They provide a framework for how to think about the articles and the news that you will read in the future. That’s why it’s fundamentally important to start reading about the market from books.
Then comes articles in this hierarchy. Articles are cool because they’re usually a lot shorter. I’m talking about 20-30 page PDF’s on Google Scholar about something you want to learn more about in the world of finance. This can seem a little strange, but there are a lot of really great and interesting topics that are really only covered in these journal articles. You could spend hours reading through some of them though and even then I may not get it. Anyway, the books that I’ve read teach me a framework about how to think about options for instance, but books also teach you which articles don’t make a lot of sense and what may be grounded in assumptions that may be wrong, and that you should investigate more into.
I think people focus too much on market commentary. On hear-and-now news that just tells you what things are doing but doesn’t explain why. These are the twitter feeds, the quick information blasts, the Business Insider articles that fill our news feeds. These don’t usually provide a lot of real substance when it comes to ways of thinking about the market, and half the time they are just click-bait headlines trying to get more viewers for ad revenue. Articles and books allow you to sort what is valuable from what is attention grabbing, and often times will teach you about why certain things in the market are moving in the directions they are.
Full disclosure; I have a general dislike of most of this “market noise” because it feeds on fear and greed. Understanding and sorting the level headed distributors of financial news from the companies that are searching for clicks will help you get more valuable information and learn actual truths about the market. Most of this market noise motivates a lot of buying and selling on Wall Street from retail investors, so by understanding how this kind of news plays a role in the psychology of the market can help you make better trades, but more importantly, it helps you filter out all of that fear that forces a lot of people to sell their long term assets before they’ve made them money. Every market down turn, millions of dollars are sold as the market dips and investors are afraid of losing more money, when they should really just stay in and wait it out. See Brexit.
As a fundamental rule, it is better to buy and hold than to try to time the market. This market noise makes it sound like it’s possible to buy the S&P at today’s price and know for a fact that you’re going to double the investment in two years or two days or whatever the guy screaming at you to buy is saying. So I would suggest looking at where you get your financial information, and make sure that it’s actually teaching you about how the market works, rather than just throwing numbers at you and telling you a few reasons about why a stock is going to go up, because it can warp your mind and your portfolio returns.