INFO OVERLOAD

Sometimes it pays to shut out the noise

As well intended as media coverage might be, it’s often highly ambiguous, overly superficial or simply wrong, and the consequences of investing on the strength of this information can be extremely damaging. Thanks to the last US presidential election, the world is less likely to take news reports at face value. That’s great, but when the media collectively sell hyperbole for the sake of a headline, it’s easy for half-truths to gather global momentum.

Once it hits a social media website, news can gather a stickiness that’s hard to shake off. As a case in point, crowd support for bitcoin – based on media reports that it would eventually hit $1 million – gave investors the false comfort it was the right thing to get into.

More deliberate examples of media hyperbole include Business Week’s infamous The Death of Equities issue of August 13, 1979. While the cover story tried to argue that inflation was destroying equities, only a few years later the sharemarket embarked on one of the biggest rallies in history.

Anxiety and greed have always been investors’ worst enemies, and this often results in them buying when they should be selling and vice versa. Much of this is due to knee-jerk reactions driven by either FOMO (fear

of missing out) or FONGO (fear of not getting out), both of which are enemies of the successful investor.

Investor paralysis

Investors who use the media’s thoughts as their primary guide risk making big mistakes. For example, there’s the commonly held perception that the yield on 10-year US Treasuries will hit 4% later this year and when it does a massive equities sell-off will lead to a major sharemarket correction.

The trouble is that if you’re sidelining yourself from the market or selling off in the expectation of this eventuality, you could be doing yourself more harm than good. While most seasoned investors won't fall victim to media manipulation, sadly, he says, this excludes the vast majority of Australians who don’t seek financial advice.

“Recent confusion over Wesfarmers' decision to split off Coles is further proof that clients are constantly drawing the wrong conclusions from media coverage,” says Wayne Leggett of Paramount Financial Solutions. “We’re having to explain to shareholders why the sumof-all-parts split means they won’t necessarily be getting any more shares as a result.”

Another misnomer often propped up by media, adds Leggett, is the expectation that emerging markets are net casualties of bond markets moving higher, due to their excessive indebtedness to developed economies. However, given that China doesn’t have debt denominated in US dollars but rather has US Treasury notes, when bonds go up it is a net beneficiary.

“Too many media sources are overly focused on being first to feed the 24-hour news cycle,” says Leggett. “As result, they’re often more comfortable for their editorial to be shanghaied by someone else’s hidden agenda than acting as gatekeepers to fair and balanced reporting.”

Negative narratives

Another mistruth that could convince investors to stay on the sidelines is the expectation that a spiralling US/ China trade war could throw a similar spanner in the works to the equities prophesy by Business Week almost 40 years ago. While trade will arguably be a source of continued market volatility, the great unknown is by how much.

In the first week of February 2018, the S&P 500 was sold off by 8% on the strength of bad news that turned out to be little more than fluff. An example of investors overreacting to misleading definitive statements include comments by Asher Edelman, an American financier, who said: “We are witnessing the beginning of the end of America’s participation in international trade.”

However, with China’s purchasing managers index (PMI), which measures manufacturing sector performance, surprisingly rising in August, together with good growth, there’s some evidence that the deleveraging campaign and trade war fears are not having a huge negative impact, suggests Shane Oliver, head of investment strategy and chief economist with AMP Capital.

“If fully implemented – tariffs of up to 25% on $US200 billion of US imports from China – it will mean that around half of imports from China will be affected, albeit it's only 10% of total US imports, so we are still a long way from 1930,” says Oliver.

Given that, at the time of writing, the S&P 500 had just surpassed its previous high of 2872 achieved in January this year, Andrew Macken, portfolio manager at Montgomery Global Investment, says the recent fall almost looks like a rounding error, which in hindsight was a buying opportunity, not a time to sell.

False impressions

Oliver reminds self-managed super fund (SMSF) members that a lot of financial media coverage is aimed at them, because they’re more likely to act independently of structured advice. But the risk of an SMSF or any investor taking financial reporting at face value is that media coverage of a company’s annual or half yearly earnings announcements is typically based on its press releases, says Macken.

The danger of press releases, says Macken, is that they draw from an adjusted measure of earnings, with numbers that are contrary to what generally accepted accounting principles (GAAP) prescribe. With certain costs excluded, Macken says investors often get a false perception of profitability, and no meaningful measure of real-life performance.

Macken says this is seen a lot in the US, where high-tech companies typically exclude the expenses associated with stock-based compensation. “We often see this in Australia where the costs associated with restructuring are excluded from management’s estimate of profitability,” he says. “Given that some companies always seem to be restructuring, it’s questionable what’s a ‘one-off’ and what’s a recurring expense?”

Hoary old tricks

Macken warns investors to be wary of media coverage that allows management to get away with fancy balance sheet manoeuvrings that are designed to hide more meaningful signals of distress on their income statements. One way to mask the impact of financial leverage, he says, is to focus investor attention on earnings before interest and tax (EBIT) and strip out charges deemed non-operating.

He also reminds investors that by only owning 49.9% of a business that may carry a lot of debt, companies are not obliged to include it on the balance sheet, and a lot of leverage can be disguised within its consolidated reporting. If there’s an enormous difference between operating earnings and bottom-line earnings or net profit after tax (NPAT), Macken urges investors to find out what it is and why.

“Investors should look for media coverage that adopts the old Reaganism of (a) ‘trusting’ a CEO’s commentary that earnings have materially increased, but then (b) ‘verifying’ it by looking for evidence of it within the numbers,” advises Macken. “If you don’t, you risk sliding down the path of click-bait, which drives readership.”