How much should we listen to the financial media?

November 16th, 2006

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Let’s take a look at this media report in The Australian (released in the afternoon):

THE stock market was down at noon as concerns about a slowing US economy kept local resource stocks at bay despite a recovery in commodity prices overnight.

Now, look at this media report in MarketWatch (released in the morning after the overnight market close in the US):

U.S. stocks rose Wednesday with the Dow Jones Industrial Average stretching to a fresh record close after surprising strength in a regional survey eased economic worries, with further help from Altria Group Inc. and Boeing Co. and news of a possible merger in the airline sector.

So, the question is, is the US economy going to be all right or is it heading for recession? The US market and the Aussie market seem to think differently. But which market?s thinking is right?

We believe that to be a successful investor, one has to filter out noise in the financial media. You have to understand that the market is the herd and the herd possess herd mentality. If you ask a member of the herd the reason why it is behaving the way it is, you will probably not get an answer based on clear logical reasoning?basically it is behaving that way because other members of the herd are doing the same. The financial media, in order to sell their stories, have to come up with specific ?reasons? for every of the herd?s behaviour even though at times, there may not be one.

The next question: who leads the herd to behave that way?

In the market, there is one group of participants who are called the traders. They have an influence in the day-to-day movement and volatility in the market. Many of these traders use technical analysis as a tool in their trading decision. The basic premise of technical analysis is that market price movements exhibit repeatable patterns, which are used to gauge the probability of future price movements. What do you think will happen if enough market participants use technical analysis? Well, the result is herd behaviour in which technical analysis becomes a self-fulfilling prophecy! So, when you hear words like “technical selling” in the financial media, you know what it means.

Thus, always read the financial media with a pinch of salt.

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