How the Media Affects Us to Believe Stocks are Going Down
When stock traders and investors follow the news closely every day, we tend to forget the purpose and the motivation behind these articles and news reports. Being aware of this might become a psychological edge in our investing.
There's a heavy overweight of negative news in the world today, regardless if we speak about financial markets or everything from climate changes to the situation in the Middle East. Why do we hear less frequently about positive news stories? Is the world really that bad?
The attention game
In this digital age, the amount of data and information available to everyone is increasing exponentially year by year. This makes it harder than ever for journalists to get attention to their news.
A common symptom of this is the ubiquitous click-bait headlines. In the printed world a good headline was one that concisely summarized the article. Today's digital headlines are most often designed to get clicks. The only way to get clicks is through a headline that is dramatic enough to trigger our curiosity.
News are often overly dramatic
TV news broadcasting is not much different. If the news you present are too boring, people will quickly switch to another channel or let their attention catch something else.
How does this affect the construction of the news? It implies that news are quite often inflated and overdramatized to get our attention. Dramatic news are most often bad news that we can worry about. Research shows that there is a huge over-weight of news with a negative angle - probably because this is what sells newspapers or at least makes us click to read more.
There's a great book on this topic by Hans Rosling titled Factfulness: Ten Reasons We're Wrong About the World - and Why Things Are Better Than You Think.
Together with members of his family, he has been doing research for decades into this phenomenon: Good news are rarely as good front page material as bad news, and the consequence is that most people actually believe that reality is much worse than it is, when you dig into facts.
Too good to be true
For instance, he has analyzed the distribution of poor people in the world. In his book, he reveals numbers that show huge decreases in the number of poor people as well as people suffering from hunger in the third world.
Even when interviewing politicians, most of them are not able to answer his questions correctly, and when presenting his research findings, most of them hardly believe it's true. It seems that we like to be deceived and prefer to have a negative perception of the world.
Our interpretation of bad news
Bad news are often (but not always) synonymous with falling stock markets. It is however important to distinguish between company-specific news and the broader news that may affect the macroeconomy.
Bad company-specific news
The classical example of bad company-specific news is the disappointing earnings report that immediately takes down the stock price. This mostly affects the company that delivered the report, although side effects may hit similar companies within the same sector.
New or less experienced investors will often sell after the news is out, expecting that the stock will continue down. This is also an example of recency bias where we think the recent development is going to continue, disregarding the remaining history of the stock.
Bad macroeconomic news
A typical example of bad financial news that affect stock markets is rising interest rates. When the interest rate goes higher, the so-called risk premium of stocks becomes lower, meaning they are at least in theory less attractive compared to other asset allocations. This effect tends to be short-lived, and looking at the history, the tendency becomes clear - interest rates have gone up and down, while stocks have continued upwards regardless of these changes.
Other bad news in this category can be related to employment rate, national debt, spreading of virus or diseases, war, and natural disasters. Having these in the back of our heads, it's hard to no think:
Is now really a good time to buy stocks?
The lost opportunity
If you compare the history of news headlines with the history of the stock market, it's clear that regardless of all the bad news that were published during the last 200 years, stocks have just kept going up at a somewhat steady rate (at least from a long term perception).
The best time to buy is usually when the bad news have just started in the media. This is what happened in the early days of the Covid crisis in March 2020. While the bad news kept playing for a year or two afterwards, the stock market had already bottomed and a rapid bull market started in the meantime. Listening to the bad news and not buying stocks in this period would have been a devastating lost opportunity.
The scenario has been repeated again and again throughout history. It feels counter-intuitive, but it's better to buy stocks when the news look really bad.
How social media can affect stock prices
Aside from the mass media, we are highly influenced by social media as well. The effects come in different shapes, as well shall see now:
Sharing of news that go viral
The algorithms behind social media always promote content that is already popular out to even more people. This is what happens when a social media post goes viral as it spreads like a virus. The content that is being spread can either be a shared news article or a post written by a random person. But dramatic headlines definitely gain more attention than news about positive developments in the world.
These spiraling effects further enhance our exposure to negative news, which again makes us believe the world, the economy, and the stock market is going down the drain alltogether.
FOMO and the lemming effect
Another issue with social media is that anyone can be an expert and promote a stock without actually having done any research. It is often seen that internet forum users start hyping a specific company, and once it starts getting traction, more and more people are likely to start following the same company and listening to all the arguments for why they should buy the stock.
If the stocks then starts climbing, this is when the FOMO kicks in - the Fear Of Missing Out. This is often the case when members of the community start bragging about their returns from the stock and their expectations going forward. Less experienced members of the community may follow this information blindly and jump on the bandwagon and buy the same stock.
What should be your takeaway from this post? Whenever we as investors feel that now is probably not a good time to buy stocks, we need to stop and think about why that is the case. Isn't it always better to buy stocks when the news are bad?