Ignore the Hype. Brian Perry
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the impact of the financial news media is insidious enough that an entire chapter of this book is devoted to the topic. But for now, let me be very clear on this – the purpose of most of the financial media is entertainment and information, in that order.
There is nothing wrong with information consumption. An awareness of what is happening in the economy and the financial markets can make you a better investor. The challenge is that the constant bombardment of sensationalist headlines exacerbates the other trends outlined in this chapter, all of which contribute to an urge to do something, even when the most successful course of action might be to do nothing at all.
Accept the news media for what it is, and utilize its output appropriately, and you'll be well on your way toward meeting your financial goals.
But if you struggle to do this, or if you find yourself susceptible to fear when the going gets tough or the urge to make more money when things seem to be good, then I'll give you arguably the single most important piece of advice in this entire book:
If you are the kind of person who is going to change your well-researched, long-term financial approach due to what you see or hear in the media, then you must do everything in your power to avoid reading or watching financial news coverage. Practice self-discipline, or cancel your cable or newspaper subscription, or don't read financial blogs, or take whatever other steps you need to take. You must do this, or your odds of financial success will plummet.
Globalization
The Change: Globalization has also played a role in shortening our attention spans and investment time horizons. Round-the-clock trading of all types of financial instruments means that the markets never close. And when you couple that with the enhanced interconnectivity of the global economy, it's easy to succumb to the urge to closely track not only domestic but also international economic and financial developments. For a professional investor, this may be necessary. But for an individual, the value of constantly monitoring global developments or trading Asian currencies in the dead of the night is limited at best. Plus, it takes time away from other activities, and money is, ultimately, just a tool. Remember, the goal of investing is to generate financial freedom, not to become a slave to your money.
The Impact: Thirty years ago, most U.S.-based investors probably kept the majority (if not all) of their investment portfolios in the United States. But today, many investors have a sizable allocation to international securities. This is a good thing and there are tremendous benefits to global diversification. In fact, this is another topic that is important enough to warrant a great deal of additional discussion later in this book.
But it is important to remember that global investing multiplies the information flow an investor would otherwise receive. This in turn can make it harder to stay the course and resist the temptation to react to market movements. Remember, the key to financial success is to act according to your plan, and not to react to external conditions.
Think back to the last time you watched a financial news channel or visited a financial website. In addition to all the other headlines flashing across your screen, you were also bombarded with the latest stock market results from Germany (the DAX), France (the CAC 40), the UK (the FTSE), Japan (the Nikkei 225), Hong Kong (the Hang Seng), and countless other international markets. In addition, key international currency exchange rates flickered across the screen in a constant rotation with other “important” financial indicators.
With so much data and information coming at you, it can be exceptionally difficult to fight the temptation to constantly shift your portfolio from the United States to the United Kingdom and from the United Kingdom to Japan, and then back again to the United States. Again, economic cycles and market movements do vary greatly across international markets, making a strategy of diversifying among international markets a potentially profitable one. But most investors will find that a disciplined and rules-based approach to global diversification makes the most sense.
To be fair, some hedge funds and sophisticated institutional investors have made fortunes through macro trading, which involves rapidly moving money around the globe based on economic developments and shifting currency values. But successful macro trading requires a particular skill set. For starters, a solid background in international economics is required. Additionally, an understanding of a wide range of financial markets, from stocks to bonds to currencies and commodities, is generally necessary to successfully invest in a macro style. Finally, a constant flow of information needs to be monitored and analyzed so that decisions on where to allocate resources can be made. Think for a moment of the sheer volume of information that is released on a monthly basis in the United States alone. Now multiply that a dozen times and you begin to get an idea of the scope of the logistical nightmare macrofund managers face.
For these reasons, most successful macrotraders employ large teams of expert professionals with experience monitoring and analyzing the economies and financial markets of countries around the globe. As an individual, alone and possessing only a finite amount of time with which to track your portfolio, the task of analyzing the vast quantity of information required to be a macrotrader becomes virtually impossible.
Importantly, I want to reiterate that just because average investors should not spend their time shifting assets around the globe in rapid-fire fashion doesn't mean that they can't benefit from international diversification. There is a vast gulf between trying to time global financial movements and setting a reasonable portfolio allocation among global markets and then periodically reviewing and rebalancing that allocation. The first approach is best left to professionals and world-class experts. The second approach is a sensible, long-term portfolio solution for average investors.
The Rise of the Institutional Investor
The Change: Headlines often tout the massive short-term gains achieved by hedge funds and Wall Street traders. But you are not a hedge fund and probably aren't going to achieve such returns. And to be fair, even most hedge funds don't achieve massive success; after all, if huge returns were common, they wouldn't be newsworthy, and you wouldn't be hearing about it in the press.
In fact, each year a large number of smart, experienced, and talented hedge fund managers are forced to close their doors because they are unable to provide superior performance. As an example, Figure 1.2 shows the number of hedge funds that shut down over one recent four-year period.
These statistics obviously prompt the question: If hedge funds, with all their resources, struggle to succeed, what does it mean for the average Joe?
Figure 1.2 Hedge Fund Closures by Year
SOURCE: Analysis by Brian Perry. Information courtesy of Zero Hedge.
The answer of course, is that the struggles of the so-called smartest investors in the world provide further proof that “beating the market” is an incredibly difficult endeavor. Professionals, as well as amateurs, should carefully consider what inherent advantage they hold over their competition, and why it is that they are likely to succeed when so many others fail.
The Impact: Consider the resources available to a hedge fund, pension fund, sovereign wealth fund, or mutual fund while remembering that even with the plethora of tools at their disposal they still face a difficult path to success. Remember, too, that trading is a zero-sum game, and that for every winner there needs to be a loser. Now think of the resources you have available for trading – a home computer and access to the Internet, maybe conversations with your broker, or access to the market analysis tools on the online trading platform you use.
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