Strong convictions, strongly held

It was early 2017, and my first day at a new job. It happened to coincide with the inauguration day for one of the most polarizing political figures in history. The wall of worry was a tall one for many investors.

There were those who claimed that if he won, the stock market would crash. Then the opposite happened as the financial markets roared higher so quickly that you only benefited if you were already positioned correctly, ahead of time. The S&P 500 was up nearly 25%, not including dividends, from election day in 2016 through the end of 2017. The first year of a presidency that was anything but stable, coincided with the most stable year of investment returns ever. 

Sound principles and a steady demeanor would have had you on the right path already.

Fast forward four years. The “other side” made similar claims as the next administration was ushered in. There was little doubt in the minds of many that this was a new socialist regime that would destroy the economy and the stock market (i.e. their 401k) with it. In particular the narrative stated that the next administration would destroy the energy industry. What followed were record profits.

Whatever side you took, it’s hard to argue that these were independent or objective thoughts. They weren’t baseless opinions, everyone has their reason and “no one’s crazy”, as Morgan Housel points out in the first chapter of his wonderful book, The Psychology of Money.

The point is not that articles and commentators don’t have valid points, most do. However, the media, or anyone else for that matter, cannot know the future. They are only reporting on the past. 

There’s an old Wall Street adage that goes something like this, “When the shoe shine boy starts giving out stock tips, it’s time to get out of the market”. I have found that it’s also helpful to pay attention to times when the media and common everyday folks bring up problems in the financial markets or with particular businesses. That often marks an inflection point of peak pessimism. I call this affectionately, my mother-in-law indicator.

As a reminder to myself of the absurdity of getting financial advice from a newspaper, I keep clippings of headlines on my office wall. If I had followed most of these, it would only have caused financial harm, regret, and emotional angst.

Headlines are meant to attract eyeballs and clicks. The authors are not giving out financial advice. It’s time that you realize that once you’ve read it in the paper, it’s already happened.

Academics in the field of behavioral finance will point to confirmation bias as a negative bias to be avoided, and posit that we should accept all information even if it’s contrary to our own strongly held convictions. 

Here’s the thing though, that is nearly impossible to do. We are human beings, not computers. We can’t process new information in an unbiased manner. Instead, I recommend that you try to come to a conviction, and then look for as much confirming evidence as you can to strengthen that conviction ahead of time. Ahead of the storm clouds. Only by doing this can you be guarded against true headline risk…paying attention to the headlines at all.