In the final analysis, it’s the wise investor who looks upon financial news and information as folly. But before I show, cast your memory back to May 13, 2012…
The euro zone on that date was still in the throes of its debt-induced crisis. Just about every financial newspaper, newsletter, TV business channel, commentator and economist in the U.S. was talking about the pending end to the pan-European currency experiment. One commentator in particular I highlight because he proves my point so well: If you resolve to improve your financial life in just one way in 2015, resolve to ignore the news…
On that May day more than 2½ years ago, New York Times columnist Paul Krugman laid out a four-step process by which the euro dies — “And we’re talking about months, not years, for this to play out,” he wrote.
As a Noble Prize-winning economist with a Princeton pedigree, surely Prof. Krugman understood better than anyone the factors that were driving the euro into oblivion. That was all the analysis you needed to rationalize a short position in the euro. If the euro was months away from death, even a modest bet on the currency’s demise would have yielded hundreds of thousands, if not millions of dollars in profits for you.
Alas, reality slapped Mr. Krugman upside the head.
The euro never came even remotely close to dying. Those who shorted the euro based on the good Professor’s additional confirmation that the currency was on its deathbed lost the wager and their wealth.
It all points to what I call “news blindness” — when you know so much that each additional piece of information clouds your judgment as an investor instead of giving you greater insight. Mr. Krugman is a case in point:
Over the last few months of 2011 and into 2012, the news media were filled with near-daily reports of crises in Europe. Infighting between the Germans, the French and European Central Bankers. Mounds of hidden debt in Southern European countries that came to be joined under the epithet PIIGS (Portugal, Ireland, Italy, Greece and Spain). Collapsing economies and increasing joblessness. Riots in Athens and elsewhere, implying without context that a very tiny group of rabble-rousers represented the sentiments of an entire country. The media told of increasing suicide rates. And polls showed that Germans hated the Greeks and that the Greeks despised the Germans.
Each additional bit of news, information and analysis — both financial and social — was another brick in the wall of proof that the euro was doomed … that the cultural differences across the Continent were too great for the currency. When Mr. Krugman said the death of the euro was months away, at most, he was adding another piece of confirmation that this must be the right call.
The euro has weathered all that the Krugmans of the world insisted that it couldn’t.
It did so because even as the daily winds of news and analysis rustled the leaves on the trees, the forest never changed.
Sober-minded Europeans have known since the 1980s that the global economy was polarizing around two primary players: America and China. Europe could either become a collection of quaint, Old World countries in which Americans and Chinese would vacation … or it could challenge the U.S. for economic supremacy alongside China by knocking down borders and obstacles (including multiple currencies) that once created economic inefficiencies across the Continent.
Europe chose to fight for its future.
The social and financial upheaval of a debt crisis was never going to alter Europe’s belief in its own future, and it was never going to kill the Continental currency … a point I was making in the early days of 2012 after multiple trips across Europe.
Don’t Be a Junkie
To be clear, this is not a story about the euro. It’s a story about the financial utility of news and information, and the dangers of applying what you think you know (because of what of you read and hear) to investment decisions. The same news blindness that led investors to bet against the euro today has investors making all the wrong decisions regarding Russia and oil.
Consider this pyramid I whipped up in Excel over the weekend:
Aside from preparing you for the day’s weather, traffic delays on your way into work and movie times at your local theater, news and information doesn’t bring much to your life. It’s a commodity business. And in the financial markets, by the time that commodity reaches you any investment value it might have had has already been extracted. Thus, it’s low value — assuming it had value in the first place.
Analysis is only marginally better — and often not even that. In the investment world, it’s typically systematized with financial advisors and money managers too-frequently creating one-size-fits-many investment strategies that reflect an “of-the-moment” analysis of the landscape that fails to account for anything beyond bell-curve normalcy.
Oil is the latest example of this news blindness. Commentators and analysts are so consumed by each piece of news and data point that has emerged in recent months that the preponderance of them now insist that oil is in a new-normal world — a near-permanent range of a $60 to $70 a barrel, nevermind all the factors that insist today’s prices are only temporarily low.
In a “more is better” world, the less you know, the smarter you are as an investor.
All you really need to know about oil is that demand for crude rises as more people have more money to spend … that more people do have more money to spend as the middle class explodes throughout developing economies … that the marginal cost for finding the oil the world needs continues to rise … and that alternative energy sources are not yet mature enough to drastically alter the global demand for oil. All the other stuff — including the various rationales purporting to explain the current price weakness — is leaf-rustling that doesn’t change the forest.
So as 2015 approaches, do yourself a favor: Resolve to stop being an information junkie and, instead, seek out wisdom. Though the wise are not always right, they see the forest — the bigger picture — and disregard the falling leaves.
That’s what I and my colleagues, Chad Shoop and Ted Bauman, try to do every day. We see the news, we see the information and we see the analysis that springs forth from both — and we apply the wisdom of our experiences to bring you solutions and recommendations we believe will serve you well long after the news cycles have changed.
It’s not how much you know that matters, but what you know to be true … because one piece of wisdom is ultimately worth more than a million pieces of news and information.
Until next time, stay Sovereign…
Jeff D. Opdyke
Editor, Profit Seeker