by The Algonquin Team, Algonquin Capital
“The man who reads nothing at all is better educated than the man who reads nothing but newspapers”
Every day we are bombarded with a barrage of news, delivered to us at breakneck speed. In theory, all this access to information should leave us more informed and better equipped to make decisions. But as the Trump campaign has reminded us, theory and practice are two very different animals.
Take for example the research done by psychologist Paul Andreassen in the late 1980s. In his experiments, investors without access to financial media earned higher returns than those that did. The group following the news closely was guilty of overtrading and overreacting to the latest headlines, thus impairing performance.
Fast-forward to today and some argue that the information overload is just too much. And in the pursuit of speed and brevity, veracity and quality have been sacrificed. Whether you ascribe to these theories or not, the reality is that it's very difficult to get an accurate view of the world through headlines. This is because the media is limited to reporting what happens and what is newsworthy. We have yet to see a special report on a company performing as expected or another peaceful day in the city.
This is why, as Newt Gingrich put it, people ‘feel’ the world is a more violent and unsafe place despite the facts indicating otherwise. As sociologist Barry Glasner notes: “Between 1990 and 1998, the murder rate in the United States decreased by 20 percent. During that same period, the number of stories about murder on network newscasts increased by 600 percent.”
Similarly, ask anyone what they think is a more likely cause of death, shark attacks or lightning strikes. They will probably be shocked to learn that it is lightning and by a factor of 30 to 75 times. With a little analytical thinking this makes sense. Shark attacks can only occur on the coast, whereas lightning can strike anywhere. But sharks make for exciting stories and great movies, making them easier to recall.
On top of delivering us the news, the media also like to trot out expert panels to opine on everything from the price of oil to tomorrow’s hockey game. Not only are there many studies showing how simple algorithms can provide better predictions than the experts, but there is also evidence that media fame reduces the accuracy of their forecasts. This is usually attributed to overconfidence and the need for these personalities to have extreme and definitive views. After all, nobody is tuning in to hear that the price of oil could be between $30 and $70 next year or that their team has 50/50 chance of winning.
At the end of the day, we must remember that it’s not the media’s job to make us better investors and voters. They get paid for clicks and eyeballs. Sadly, sound financial advice and deep political analysis are boring, repetitive and don't always fit in 140 characters or less. We will keep this in mind no matter who becomes the 45th US president.
Algonquin Capital Corp., manager of the Canadian credit-focused fund with the best one-year return at the industry awards, has outperformed by pulling back on risk ahead of big global events.
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