I’ve Got Terrible News
Gotcha! People's brains are hardwired to pay attention to negative news. Its science.
Just like bad news sells newspapers, cable news or really any type of media, the same is true for financial news.
I got you to read this, didn't I?
Financial executive Cullen Roche said it: "Working in personal finance is…50% telling people not to overreact to financial news." The other 50%, according to him, is unsubscribing from email spam, but that's really just my challenge, not yours.
Financial conditions come in waves, not straight lines. There are ebbs and flows. When things ebb, that's what will be reported. Whatever things are flowing will be ignored. Those flows tend to come in small increments, over time and are harder to notice. The ebbs come in attention grabbing fits. How those ebbs and flows crash into investor expectations is what moves things.
Sometimes bad news does impact evaluation of an investment and LCM has to adjust. This is more the case when looking at a particular investment, when specific scenarios exist to evaluate.
So, how to decide what bad news to pay attention to?
The easiest way not to get stuck in a doom loop is not to read it - LCM absolutely recommends avoiding "the news" if you can. If you must indulge, decision expert, Annie Duke recommends one tactic LCM uses: a pre mortem. Before the bad vibes get you down, take time to frame the question as "things have already gone wrong, what are the events that led to this outcome?" If the bad news you're reading about isn't one of those things, or, the collection of things that led to your hypothetical bad outcome, then don't sweat it too much.
An example: LCM invested in a LNG export facility operator. Investors love to trade its shares in tandem with natural gas spot prices since that’s what the company sells. When LNG prices fall. Shares fall. This makes sense, except the overwhelming majority of the company's business is tied to a fixed fee based on volume delivered under long-term contracts. Its cash flow - where its value actually comes from - doesn’t change with natural gas prices. There are other things that can go wrong with for the company, to be sure, but natural gas prices are not at the top of the list.
So, if you can't just avoid the news, at least make sure you're paying attention to the right signposts. Decide which ones are relevant for your decisions beforehand, focus on those and try to ignore the rest as best you can.