Ask the Question

Story Notes:

• If most people believe something to be true which you can disprove, you may have a reasonable basis for a market bet.
• Disproving widely held beliefs parroted in the media can help prevent common investing errors, like turning bearish and selling stocks during a bull market.

You may have noticed that occasionally at MarketMinder, we poke a little fun at the media. But we're not going for cheap laughs (well, most of the time). Observing the media with a cynical eye can help reduce investing errors.

A guiding principle at MarketMinder is investors should question everything—particularly if it's something widely believed and especially if it's something you believe too. Why? Because if you can prove something everyone believes is wrong, you have a reasonable basis for a market bet. You can bet against the masses and win—not every time, but more often than not.

Today, the media serves as a reasonable proxy for investor sentiment. It's not perfect, but in general, an oft-repeated storyline is one most folks likely buy into. And, those scary headlines frequently imply (or outright predict) a dire outcome. How can you use this knowledge?

Consumer Confidence Drops in September
By Annie D'Innocenzio, The Associated Press
https://www.washingtonpost.com/wp-dyn/content/article/2007/09/25/AR2007092500605.html

Anything "dropping" sounds bad. Even worse, consumer confidence hasn't been this low in two years! The article concludes rough times for employment, consumer spending, and the economy are dead ahead. Ask, "Can you really tell all that from consumer confidence numbers?"

Nah. MarketMinder's response would likely be, "Yikes! Consumer confidence hasn't been this low since just before two years of strong US stock returns!" A little fun poked, but also an important investing lesson. First, one indicator on its own doesn't tell you anything about anything. Second, as we frequently remind MarketMinder readers, consumer confidence is backward looking and not predictive of future returns.

Try again with another headline.

Analysis: Dollar's Slump Can't Be Ignored
By Rachel Beck, The Modesto Bee

This hits on all the major "weak dollar" fears. Big trade deficit. Slowing economy. Higher oil prices. Oddly, this article claims foreign investment in US assets has been and will continue slowing because of the weak dollar, and that's bad. That directly contradicts the following article which states foreign investment is increasing and that's bad.

The U.S. Is on Sale
By the Staff, MarketWatch

Odd. Anyway, most folks agree a weak dollar is an economic and market negative, so ask, "Is it true a weak dollar is all that bad?" Again, data is available free from most major finance web sites, but consider it this way. The dollar's been generally weakening over the last five years, all during a bull market. What about historically? Stocks have risen just fine on a weak as well as strong dollar—weak or strong, the dollar's strength doesn't dictate stock direction.

But if a weak dollar causes a big trade deficit, wouldn't that slow the economy and hamper stocks? No and no. First, the dollar's strength has overall little impact on our balance of trade, and we'd argue America's big and growing trade deficit is symptomatic of good economic health, not a harbinger of economic doom. (Don't believe us? Ask the Germans and the Japanese how their trade surpluses have been treating them over the past 20 years.)

Finally, here's a real heart stopper:

Home Prices Plummet in Steepest Drop in 16 Years
By Staff, CNNMoney.com

Plummet! Yikes! That sounds scary, so it's time to ask, "Will ‘plummeting' home prices sink the market?" Our comment would be, "Yawn. Also note in 1991 the S&P 500 was up nearly 31%." "Plummeting" home prices didn't whack the market in 1991, and they don't have to whack the market today. (For more on why dropping home prices don't spell market doom, you can revisit some of our recent commentaries.)

None of these fears have the implied market impact. Could something else creep up and send stocks lower? Sure, but it's likely not these or other frequently parroted concerns. The danger in blindly accepting what you read is, if you're inclined to bearishness right now, constant confirmation your view is correct could be enough to make you sell your stocks—a major error in our view. By injecting an ounce of cynicism, you can begin seeing holes in the scenarios these articles suggest. In investing, you don't need to be right 100% of the time—just right more often than wrong. And lowering your error rate can go a long way toward boosting your long-term performance. So go ahead. Ask a few questions. It won't hurt our journalist friends. But failing to do so could hurt your portfolio.