Investor sentiment is a driving factor in today’s marketplace. Unfortunately, it is not always based on research and fundamental analysis. Quite often, it is the news hype that sways investors decisions. For mainstream investors, these effects can be known as “noise trader” risks. Some professional analysts say that noise traders tend to overinflate the price of securities during bullish trading cycles and depress the price of securities during bearish trading. The problem with this is that research indicates noise traders achieve no better returns than simply making random investment choices.1
Looking back, the 2008 financial crisis was the most severe worldwide economic crisis since the Great Depression. It began with cheap credit and relaxed lending standards that fueled a housing bubble. In simple, too many individuals had taken out loans that they couldn’t afford. The aftermath of this catastrophic event wiped out a large portion of many American’s retirement savings and affected the economy long after the stock market recovered.
One major problem during this crisis was investors who fell prey to news media hype, and the “dooms day” prognosticators. Many individuals sold off their stocks inflight of safety. Unfortunately, the result further amplified the market correction and secured their losses. Below is an example of two different individuals who invested $100,000 in the S&P 500 in March of 1994 (30 years ago). The first investor sold his shares in March of 2009 (the midst of the financial crisis), and then waited 5 years to reinvest them in March of 2014 (when the market recovered). This individual would have approximately $711,516 in March of 2024. The second individual stayed invested the entire time. Assuming they reinvested all dividends, the second investor would have roughly $1,941,783 today (more than double that of the first individual).2
This is a great example of why it is so important to stay invested, and not attempt to time the market. Below is a graph that highlights the S&P 500 performance from 1970-2022. You can see that while the market has its ups and downs, it has always recovered to a higher high.3
So, what is the difference between noise and news in the market, and how can you distinguish between the two?
Noise refers to information or activity that confuses or misrepresents genuine underlying trends. A New Scientist article claims that fake news spreads six times faster than the truth.4 With it comes small price fluctuations – called volatility – that distort the overall trend. Negative news will normally cause people to sell stocks – a bad earnings report, corporate scandal, economic or political uncertainty, and natural calamities – all translate to selling pressure and a decrease in the prices of most stocks, while positive news has the opposite effect.5 As an example, analysts may have a model that suggests the value of ABC stock is $10 per share, but due to negative news in the media, the stock is now oversold by noise traders, causing the stock to trade at only $8 per share. This creates a buying opportunity for those who keep their eyes on the horizon and filter out the short-lived noise.
Material news is what’s important in the long run. This is information that is released by the company itself, and includes details such as corporate events, earnings, stock splits, and all other price-sensitive developments in a company. The release of material news can move the share price of a company’s stock up or down, depending on theoutlook.6
Fundamental investors focus on financial statements and economic indicators to assess an asset’s true intrinsic value. Warren Buffet, one of the best-known fundamental investors in the world, is quoted to have said, “All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.” He urges investors to, “not take yearly results too seriously.” A simple rule further dictates his buying strategy: “Be fearful when others are greedy and be greedy when others arefearful.”7
In today’s marketplace, we are flooded with a wealth of information, and at an increasingly rapid pace. As investors, we are in the business of absorbing information, understanding the world around us, and drawing conclusions in order to make the most informed choices.8 Any experienced investor knows that daily stock price movements have no bearing on the long-term performance of their holdings. The underlying financial health of a company is far more important than a short-lived news article.
At Stevens Capital Partners, we take a disciplined approach to managing your investments. We custom tailor portfolios based upon each client’s individual needs and objectives. Let history be a lesson – develop a financial plan, stay the course, and focus on your individual financial goals. Doing so will help you drown out the current “noise” of the media and set you up for greater financial success in the future.
1. “Noise Trader: Meaning, Technical Traders, Agenda” by Gordon Scott—July 27, 2021.
2. Of Dollars and Data—&P 500 Historical Return Calculator (With Dividends) by Nick Maggiulli.
3. TopForeignStocks.com “Growth of S&P 500 Through Crisis and Events from 1970 to 2022: Chart” by David Hunkar on February 2023.
4. Kiplingers, “10 Things You Must Know About Bull Markets” by Anne Kates Smith—January 23, 2024.
5. Investopedia, “How News Affects Stock Prices" by Brian Beers—April 25, 2024.
6. Invstopedia, “Material News” by Lucas Downey—February 19, 2021.
7. US News / Money "8 Best Warren Buffett Quotes of All Time” by Brian O’Connell—November 14, 2023.
8. “Noise vs. News” by Diandra Ramsammy—November 5, 2019.
