Does News Drive Your Investment Decisions?

According to Newsweek, on the 24th of August, “Dow Jones Drops 1,000 Points on Open Before Recovering Slightly.”  Does that matter?

Maybe.  Come back in two years and I will know.

Market prices decompose into several factors.

  1. The index is based on the price of particular securities.  Only a few of all the choices.
  2. The fundamental value of the security which is based on its ability to earn free cash flow.
  3. It is based on the nature of the stock’s competitive position in its industry.
  4. It considers the extent of government disincentives present , proposed and possible.
  5. The nature of the larger world where the industry operates matters
  6. The psychology of the crowd that might buy the security.

Of these only 6, and maybe 5 are different on the 24th from what they were a month earlier.  GE is the same business exactly.  Microsoft, Google and Apple.  All unchanged.  WalMart might even be busier.

The only thing different is how people see the value of their stock. Some of that perception is incomplete.  Some is emotion.  Some is just wrong.

If you intend to invest to make money based on how people might think/feel some day in the future, you will have an unpleasant life.

Lengthen your time frame. Manage your expectations, and seek out fundamental value. Intelligent diversity helps too.

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Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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