Welcome to Finance and Fury

  1. 2020 has seen a very noisy start to the year – But what’s new?
    1. The media is constantly reporting on one major event after the other – fear sells better than nice stories –
    2. The more fearful the event – the more traffic that is driven on clicks – the more clicks the more revenue from advertising – always remember that – their only incentive is to make money first – and reporting on the stories that will make the most money comes before informing you
    3. The greater the human or investment market implications a story implies – the more fear comes with it
      1. And it is constant – 24 hours per day, every day each week – never a break from bad or fearful news
    4. Today – want to talk about strategies to sift through what is money-making clickbait – especially when it comes to investments – and how to
  2. First – look at the news cycle for Australia in 2020 so far –
    1. Started with bushfires, moved on to WW3 with US/Iran tensions, now the coronavirus outbreak is creating fears of a global pandemic – all being reported that it could be a big hit to global economic activity
    2. The way these topics are covered are scary in terms of their consequences – mass deaths and potential economic fallout
      1. Creates significant uncertainty around the short-term economic outlook
    3. Then again much of 2018 and 2019 saw endless talk about how much the trade war was going to knock off global growth, Brexit was going to cause a massive economic shock, that Trump was a Russian asset, that Korea was going to nuke the USA, the list goes on – there is a never-ending worry list – news these days turns out to be just opinion pieces and noise
    4. But all of this reporting relies on one thing – our myopic natures – or the fact that once a new global scare is reported on – we forget about the world ending event that was reported on just a week prior –
      1. Do an exercise – look at the major headlines of news in the way back machine – or in newspapers from the 50s or 60s, 70s, 80s, etc –
    5. Truth be told – probably never been an easier or safer time to be alive – but if you are trapped in a mental prison – you may not think so – that is what it comes down to – us –
      1. Again – our myopic nature and a lack of real education of the past creates the image
      2. With technology and social media – created a huge psychological aspect to this that is combining with the increasing availability of information and intensifying competition amongst various forms of media for clicks, that is magnifying perceptions around various worries.
  3. Our natural state shouldn’t be to worry – but we are biologically driven to do so when presented with bad information
    1. Epigenetically – those who survived hunter-gatherer days were those who were most in tune with danger – watching out for animal predators in nature – or worrying about having enough food to survive the winter – real dangers to survival
    2. But those real problems no longer exist for over 99% of us in the Western world – however we are still hard wired to look out for them
    3. Therefore – We all suffer from these behavioural traits – to watch out for dangers – in its financial manifestation this is known as “loss aversion” – essentially – a loss in financial wealth is felt much more than the joy felt from an equivalent sized gain in wealth
    4. Being aware that we are naturally biased to be more risk averse and on the lookout for threats which leaves us more predisposed to bad news stories as opposed to good news stories is the first step – So bad news and doom and gloom stories find a larger audience than good news or balanced commentary – appeals to our instinct to look for threats
      1. Bad new sells – Obviously, those in media know this – and prey on our aversion to risk to sell more stories
      2. Also – remember that media outlets all competing for your attention – so have to outdo the other in shock and awe and hence- tend to overexaggerate the real effects – so remember there is no balanced news
    5. This is further compounded by the over exposure to bad information in relation to our daily lives and our investments
      1. Just 50 or 60 years ago – humanity didn’t have to see the bad events of billions of people unlike in the online era of the internet
      2. The information age is what it is referred to as – This is great in the sense that we have access to more information then ever – but information is not knowledge – especially when the information is not accurate – and therefore not useful –
      3. Another issue with information is that it is almost impossible to digest all the information out there – nobody has the time – and if we can’t filter it, it becomes information overload and therefore noise
  1. Information overload is bad for investors as when faced with more (and often bad) news we can freeze up and make the wrong decisions with our investment as our natural loss aversion
    1. Combine this with our availability heuristics and what is called the “recency bias” – it is a bad outcome for our mental stability –
    2. Availability heuristics is that we put more weight to something if we hear more about it – for example – if you hear about the dangers of the coronavirus more so than the dangers of heart attacks – people are more afraid of a virus where 99% of cases are in China – as opposed to exercising and eating properly – heart disease is the leading cause of death in Australia and whole world – for both males and females
      1. 2015 – heart disease caused 12.4% (19,777) of the 159,052 deaths in Australia
      2. I might be wrong here – but I don’t think one person has died in Aus from the Coronavirus – but every year over 6,000 people in Aus die from Coronas/alcohol-related diseases
    3. Recency bias is when we give more weight to recent events – again thanks to our myopic nature

What can you do to tune out what is noise and what is actual news – How to manage the perpetual worry list

  1. Evidence – I am amazed at media reports with no backing evidence – hence opinion pieces
    1. When there are no statistics or evidence backing claims -just ignore – treat this as just noise
    2. When you read a news article that doesn’t back up any claims – and states that something will happen – again – just treat it as noise – ignore it
  2. Understand how markets work – Information is not knowledge – knowledge is not power unless applicable
    1. A diverse portfolio of shares returns more than bonds and cash over the long-term because it can lose money in the short-term
    2. The share market can be highly volatile in the short-term – we all want to minimise our losses –
    3. My major concern is not market volatility – but the control over markets that Central banks now have –
    4. Volatility is driven by worries and bad news increasing levels of volatility is normal – it is the price to be paid for accessing higher long-term returns – but this can be done in an intelligent way

  1. Focus on the long term – Truth is that markets go up more than they go down
    1. Put the latest worry list in context and focus on the long term – Remember that there has always been an endless stream of worries. The danger is that information overload is making us worse investors as we focus on one worry after another resulting in ever shorter investment horizons.
    2. The global economy has had plenty of worries over the last century, but it got over them with Australian shares returning 11.8% pa since 1900 and US shares 9.9%pa
    3. This being said – there are structural issues wrong with the economy at the moment – low-interest-rate environment creating an increased appetite for risk – many companies on the market losing money while their share prices increase – Fed QE policies pushing up markets –
    4. But the media isn’t over-reporting on these factors – which are the real concern at the moment
  2. Focus on your strategy – Helps to filter news so that it doesn’t distort your investment decisions
    1. Your investment philosophy and strategy – if you don’t know what this looks like – workbooks in the members section of the website – financeandfury.com.au – help you work through it
    2. Help you in building your own investment process – all about focusing on a long-term strategy – does depend on how much you want to be involved in managing your investments.
  3. Don’t check your investments so much – Be less myopic – similar to checking the news daily – checking investments too much in the short term will increase the availability and recency bias – make you think that investments go down more often than they do over the longer term
    1. If you track the daily movements in the ASX – it has been down almost as much as it has been up- has slightly more negative days at almost 50/50 – day to day it is pretty much a coin toss to a positive or negative return –
    2. But looking at each month and allowing for dividends – positive becomes 65% – negative 35% of the time
    3. Looking at a yearly basis – the probability of a positive year is about 80% – losses at about 20% for Australian shares and 27% for US shares
    4. Looking over a decade – ASX is almost at 100% and US shares at 82%
      1. Part of the reason why I have been talking about potential downturns in the near term is that we are approaching our positive decade in the next year – US is gone beyond their positive returns
    5. But in short – The less frequently you look the less you will be disappointed and so the lower the chance that a bout of “loss aversion” triggered by a bad news event will lead you to sell at the wrong time

  1. Be Contrarian – look for opportunities that bad news throws up. Periods of share market turbulence after bad news throw up opportunities as such periods push shares into cheap territory.
    1. Use the knowledge from this podcast to protect yourself – it is okay to invest now – but if the Fed reduces QE and share buy backs decline, then markets may be in for a tumble – be prepare to take advantage of them

 

Summary –

  1. My experience around investing has been that there are always little stories that are over conflated – a lot of these are distractions away from the structural issues and real reasons markets go through highs and lows – end up just distracting you from your financial goals
    1. Why it is important not to take extremes – be prepared but not frozen by fear –
  2. Plan for the worst – if markets go down – do you need the funds in the next 3 years? – if yes, don’t invest everything you have
  3. But keep cash and non-correlated investments – in conjunction with investments that will retain confidence
    1. Not a fan of financial institutions at the moment – looking over the last 30 years that is where a lot of the financial crashes centre around – so while the market can drop by a lot – banks drop by more while other companies that we rely on to survive – don’t drop as much
  4. But ignore the media news – no way to tell when markets will go down – but having investments in the market is important – If you don’t have any – maybe hold off for a little bit – and buy if a decline starts

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

 

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