Investors need to look behind half-truths and media misinformation to ensure they make the right decision.
Ever since President Donald Trump entered the United States political landscape over eight years ago, the world has been less likely to take news reports at face value than ever before.
That’s great, but when the media collectively sells hyperbole for headlines, half-truths gather global momentum.
Once it hits a social media website, the news can stick.
For example, investors piled into cryptocurrencies after Donald Trump’s second ascension to the white house with vigour previously reserved for blue-chip stocks.
More deliberate examples of media hyperbole include Business Week’s infamous The Death of Equities issue of 13 August, 1979.
While the cover story argued that inflation was destroying equities, only a few years later the share market 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 FOMO (fear of missing out) or FONGO (fear of not getting out), both enemies of the successful investor.
Investor paralysis
Investors who use media nuances as their primary guide risk big mistakes.
For example, there’s the commonly held perception that Trump’s tariffs haven’t finished playing havoc with the market with the other shoe of the recent market correction yet to drop.
However, Shane Oliver chief economist with AMP says that despite US shares sliding into correction territory - with a 10.1% fall from their highs – he believes rising economic pain via pressure on Republican politicians and a plunge in shares will ultimately see Trump back off. This will result in tariffs settling below Smoot Hawley levels.
It was the Smoot-Hawley tariffs of 1930 that famously contributed to the severity of the Great Depression as other countries retaliated and global trade collapsed.
However, 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, this excludes the vast majority of Australians who don’t seek financial advice.
Wayne Leggett of Paramount Financial Solutions believes too many media sources are overly focused on being first to feed the 24-hour news cycle.
"As a 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 spiralling trade wars could throw a similar spanner in the works. This is similar to the equity prediction by Business Week almost 40 years ago.
Trade wars will arguably be a source of continued market volatility but the key unknown is by how much.
While there are a number of possible implications resulting from Trump’s trade wars, Oliver reminds investors it’s far too early to assume they will occur.
Three key negative narratives to watch include:
- Trump’s tariffs will add to the Reserve Bank’s case for more rate cuts, given that they pose more of a downside risk to Australian growth and less of an upside threat to inflation.
- There’s a high likelihood of a 15% plus correction in global and Australian shares from recent record highs, before the tariff war settles down and more positive forces around Trump’s tax cuts and deregulation and more Fed rate cuts get the upper hand.
- There’s now a real risk that after 2 April average US tariffs will have risen to levels around or maybe even higher than they were after the Smoot-Hawley tariffs of 1930.
False impressions
The danger of listed companies' press release-driven result announcements, says Montaka Global chief investment officer Andrew Macken, is that they draw from an adjusted measure of earnings, with numbers contrary to generally accepted accounting practices (GAAP).
With certain costs excluded, Macken told Azzet that investors often get a false perception of profitability, and no meaningful measure of real-life performance.
Macken says this is seen in the U.S., where high-tech companies typically exclude stock-based compensation expenses.
“We often see this in Australia where the costs associated with restructuring are excluded from management’s estimate of profitability,” he told Azzet.
“Given that some companies always seem to be restructuring, it’s questionable what’s a ‘one-off’ and what’s a recurring expense?”
Smoke and mirrors
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.”
Investor survival guide
As well intended as media coverage might be, it’s often highly ambiguous, overly superficial or simply wrong. The consequences of investing on the strength of this information can be extremely damaging.
Here’s a list of what to look out for:
- Temper nanosecond reporting with in-depth coverage.
- Allow time for fact verification, thorough analysis and well-written reports.
- Consider outsourcing some of your investment portfolio to a professional.
- Dismiss definitive statements for what they are.
- Look beyond headlines and biased coverage.
- Avoid coverage that only feeds you what management wants you to focus on.
- Avoid brokers who recommend buying or selling based on a 20-word summary.
- Curb your attraction to bad news.
- Remember that commentators can be wrong.
- Draw on financial history to provide context.
