FIS Evidence-Based: Ignoring the Siren Song of Daily Market Pricing
October 6, 2014 | By fischer |
Welcome to the next installment in our series of Fischer Investment Strategies Evidence-Based Investment Insights: Ignoring the Siren Song of Daily Market Pricing.
In our last piece, “You, the Market and the Prices You Pay,” we explored how group intelligence governs relatively efficient markets (as well as jelly bean jars) in an imperfect world. Today, let’s look at how prices are set moving forward. This, too, helps us understand how to play with rather than against the wisdom of the market, as you seek to buy low and sell high.
News, Inglorious News
What causes market prices to change? It begins with the never-ending stream of news informing us of the good, bad and ugly events that are forever taking place. For example, when there are reports that a fungicide is attacking Florida trees, orange juice futures may soar, as the market predicts that there’s going to be less supply than demand.
But what does this mean to you and your investment portfolio? Should you buy, sell or hold tight? Before the news tempts you to jump into or flee from breaking trends, it’s critical to be aware of the evidence that tells us the most important thing of all: You cannot expect to consistently improve your outcomes by reacting to breaking news.
Great Expectations
How the market adjusts its pricing is why there’s not much you can do in reaction to breaking news. There are two principles to bear in mind here.
First, it’s not the news itself; it’s whether we saw it coming. When a security’s price changes, it’s not whether something good or bad has happened. It’s whether the next piece of good or bad news is better or worse than expected. If it’s reported that the aforementioned orange tree disease is conti