Don’t Get Led Astray by News

02/21/2012 10:15 am EST

Focus: MARKETS

Buff Dormeier

Senior Vice President - Investment Officer, Wells Fargo Advisors

The popular news or headline often misleads investors, says author and market analyst Buff Dormeier, although watching the market’s reaction to the news can often be more helpful.

A lot of people see the headlines. They hear the television news programs talk about the stock market. Do investors use or misuse this news and headlines?

I’d say more typically they misuse. Many investors see a news story and they immediately judge it, and if the news is what they deem good they expect the stock to appreciate. If bad, they expect it to decline.

Well, often that doesn’t come out as investors believe, and moves the other way…so they think that the markets made some sort of colossal mistake. Well the mistake was not with the market. The mistake was with those investors and their anticipations.

Often a market is just accumulation of what people have already anticipated, so if the market is up it’s because people have already anticipated that the news will be good, and if the market is down it’s the culmination of people’s anticipation that the news looking forward will be bad.

So by the time you see the headlines or the lead story on the nightly news, it’s pretty much old news, and you should not use that as an investment tool?

I would say you need to watch how you use that investment tool. You know, it’s the job of media companies to pump up stories, and again the markets have generally already anticipated much of those headlines.

So as an investor you should anticipate the news stories, and also watch how investors react to the news stories. Because it’s not necessarily the story that’s really the important information, but what people have already anticipated, and how they react once the news story is released.

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