Why Do Investors Look at the Wrong Information?

It is difficult to beat the market. Individual investors who try to do so have, on average, results that are decidedly inferior. And not just by a little. It is more like half of the market return. They try to time the market using all of the wrong methods. They are afraid when they should be active. They are "all-in" when they should be cautious.

We are developing some general themes -- common mistakes -- but our effort is one of building the case a step at a time.

An Example

Before departing on a long weekend of pure relaxation, we tried to leave investors with an insight that we felt was particularly valuable. Our experience shows why getting perspective is important.

Earth to OldProf: They do not get it! We posted an article on why accounting rules may be misleading investors. We know that this is important for several reasons:

1. It affects all of the financial stocks, an important key to the market;
2. General understanding of the issues is poor and reflected in the prices of many stocks:
3. The financial write-downs get plenty of daily play, with each new story changing analyst estimates.
4. The crucial element of understanding requires knowledge of accounting rules, the immediate effect, and the longer-term implications.
5. The big mainstream media sources report each fact, but often do not provide an analytic framework.

With this in mind, we wrote about how the rules affected a key company, AIG (AIG), and the market impact. Quite frankly, we hoped and expected that this would generate some interest and comment. Wrong! What were we thinking?

We checked this with our own small focus group and got a big yawn. No one wants to think about FAS 157. It is over the barrier of complexity. If things get too technical, everyone tunes out, no matter how important the topic.

The focus group was correct. We pay little attention to daily traffic at "A Dash" since we are not doing advertising, but we do periodic checks to see what resonates. FAS 157 causes eyes to glaze over. No one cares.

This myopia is empowering for those who take each issue to the lowest common denominator. FAS 157 was a big story when the bearish bloggers saw last November 15th as a doomsday date like Y2K. When it did not happen, the powerful writers in mainstream media did not point this out. There is no accountability. It is easy to make big predictions of write-downs. And it is newsworthy, picked up by all of the popular media sources and financial television.

Conclusion

There is always a way to appeal to an audience without providing understanding. Realizing this is the biggest challenge and the biggest opportunity for investors.

The credit market issues are difficult to understand. Investors and traders are not really capable of making independent decisions. Even if they work to get the facts, it also requires a solid analytical framework.

We shall pursue this with some other examples. Meanwhile, we need to work on article titles! Maybe if we had called the article DOW 15000 and included the Sports Illustrated swimsuit indicator, with a picture or two, it would have gotten more attention.

Understanding why FAS 157 is important is both more important and more challenging.

Comments

[User 22095]

Thank you for your article on FAS 157. I've been pounding the table on this issue for a long time. The media loves to put the headline out there about the multi-billion dollar writedowns, but there is very little discussion about the catalyst for the write down, the nature of the assets that are being written down, the potential for a large portion of these assets to perform as originally expected, and there will be some very large paydays for investment banks that have marked the assets down to very distressed levels and hedge funds that are buying these assets at very distressed levels. This could happen perhaps as early as the fourth quarter of this year. There is clearly a crisis of confidence in many forms of financial assets, and deleveraging will continue to be painful in some areas. People underestimate the dynamic U.S. financial system. Keep up the good work.

[Jeff]

Thanks, 22095. Maybe we'll see some more articles on the topic.

Jeff