The Financial Media’s Irrationality

More than a century ago, John Pierpont Morgan, who founded the influential investment bank J.P. Morgan in 1871, was asked about the future of the stock market. He answered, “It will fluctuate.”

To Morgan, it seemed that the act of share prices moving up and down daily is a normal event – it’s a given. But for many others, there seems to be a need to explain every short-term movement.

Just take a look at some of yesterday’s news reports on the U.S. stock market. When the market opened, a headline blared “US stocks rise as dollar stays strong.” Then, when the market closed, the following headline appeared: “US stocks dip as dollar strengthens.”

So, is a strong U.S. dollar good or bad for the U.S. stock market? If you’re scratching your head in confusion now, you’re not alone – I’m confused by these headlines too. To me, it seems like a classic case of the media trying to find a reason for a phenomena (in this case the rise and fall in U.S. stocks in the same day) when none exists.

Given such instances, it’s important that investors are able to differentiate between what’s important to an investor and what is not. Often, what the stock market does over the short-term – and the reasons given by the media behind said movement – is really just noise. There’s no actionable long-term signal.

Foolish Summary

The best practice for you as an investor is to keep a long term outlook on the companies that you are invested in instead of fretting over the latest news. As my colleague Morgan Housel wrote:

“Maybe 1% of the news stories I read [over the last five years] were important. I can’t believe how much time I wasted reading things that didn’t matter. If someone from the future could write this morning’s newspaper, publishing only what turned out to be important, it would be 90% shorter.”

Don’t worry about what is happening to your businesses today or tomorrow. Instead, spend time thinking about how they might progress over the next five, 10, or 20 years.

Instead of worrying about whether the market is going to rise or fall by X% today, spend time thinking about the long term challenges of the companies you own and whether management is actively putting in place plans to address those issues.

At the end of it, it’s the long-term health of the businesses you own shares of that really matter.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.