Call it the “Jaws” phenomenon. A shark attacks some beach-front swimmer somewhere in the world. The news media picks up the story, and for a few days (at most) we all learn about shark attacks as various experts describe why sharks do what they do, how to avoid shark attacks, etc. And for maybe the next week or so, ocean swimmers everywhere think twice before getting into the water. Some swimmers even avoid the water altogether. Is that rational behavior?
As investors, we unfortunately face the same “terror” phenomenon. Hardly a day goes by when there isn’t some piece of catastrophic economic news (at least it’s played that way by the media) from somewhere in the world, and based on that news, the financial pundits and experts tell us with certainty what’s going to happen to the financial markets in the coming days/weeks or months. And how do investors react? Not too rationally.
The drawing above makes the point clearly: the more investors pay attention to the headlines, the more likely we are to make a mistake. You might have heard of this guy named Warren Buffett, who seems to know a little about investing. He said just this week that investors shouldn’t act on headlines: “I think the worst mistake you can make in stocks is to buy or sell based on current headlines.” I’d add to that bonds, real estate, commodities, and any other asset class.
Making investment decisions based on headlines is like staying out of the water because of a shark attack story. The odds of being attacked by a shark are really (rationally) quite low. The odds of making wise investment decisions based on headlines are also quite low. Instead let’s go to the movies to be entertained and watch/read the news headlines for sensational stories that give us something to talk about. Just remember to keep it at the talking level–there’s really no good reason to make an investment decision based on a headline.