Recently, academic researchers have proven and quantified the impact of fake news and how it sways stock prices to the tune of approximately 7% with small-caps, 5% with mid-caps and somewhat less with large-caps. Disinformation and propaganda is all around us. As investors, we must be attuned to how these affect our portfolios.
The current global environment illustrates this labyrinth of untruths. President Vladimir Putin's propaganda has been so effective within Russia that The Seattle Times recently reported that some 58% of Russians support his so-called "anti-Nazi" justification for invading Ukraine. Another recent example is all the disinformation and anti-vaccination propaganda - undermining both the measles vaccine for children and the COVID-19 vaccination efforts.
Before I offer you my five tools and the steps I take to protect my portfolio from news fraudsters, I'm reminded of Senator Daniel Webster's quote from his Congressional speech in 1833. "The study of money, above all other fields, is one in which complexity is used to disguise truth or to evade truth." I believe that disinformation, misinformation and fake news are all synonyms. However, in today's politically charged partisan news landscape, I believe it's also synonymous with "something that someone does not agree with."
It is my sincere thinking that the exchange of accurate information is the essential lubricant that facilitates reasonable people to live free and conduct commerce and maintain functional effective financial markets.
Today, unfortunately, our beliefs have been so eroded that no one trusts anyone anymore when it comes to the news. We've all become leery of the blurred lines between truth and lies. If you are not leery of today's news, you should be.
I find it fascinating that modern library science courses teach one to think like Sherlock Holmes — teaching "lateral reading" to unearth clues to the truth. Here in Seattle, the University of Washington has a class entitled "Calling Bullshit in the Age of Big Data." The university also hosts an annual event for librarians and teachers called "Misinfo Day." How's that for being mainstream and validating my thesis?
We know that we must do something to protect our assets. But what can we do as investors? So here's my own personal roadmap to information hygiene.
Acknowledge the reality of disinformation and remain vigilant. This takes discipline. Don't let your guard down — ever. If it sounds too good to be true, or it sounds too negative, odds are the truth is somewhere in the middle. And don't get emotional. In our book, there's an entire chapter on the Investor Self which will help you stay objective and keep an even keel. As Benjamin Graham said, "The market is a pendulum that forever swings between unsustainable optimism and unjustified pessimism." As your market intuition grows, you'll become better at sniffing out the deep fakes.
Know the sources of the information. A major red flag for myself is when there's a lack of transparency or the writer remains anonymous. I stick to large credible news sources that are willing to direct me to corroborating sources and links. I will often copy the headline into Google's search engine and see if the results yield other known credible news sources. Only then am I inclined to embrace the news as true. The caveat here is to recognize that every media source has a bias.
Scientists have designed remarkable algorithms which facilitate machine learning to catch fake news. There are a number of websites that do fact-checking, but my personal favorite is mediabiasfactcheck.com. This website has a nifty system of color-coded dots and a scale from zero-to-ten to rate both bias and factual accuracy. That leads to my next tool. The best we can do as investors is to stack the probabilities of truth in our favor. There is no 100% certainty, but we can get close.
The fourth tool is really to challenge you as investors — you must have a clear and well laid-out methodology. My personal probability enhancer is the 10-stage paradigm I've followed for decades. No single stage can guarantee investment success, but collectively the 10 stages all contribute positive probabilities and together they produce a consistent profitable result. In other words, no single piece of disinformation alone can cause the collapse of your portfolio. It virtually puts the wind at your back and insulates you from fake news, disinformation and disaster.
For the thousands of you who've read our book, this probability-based approach clearly makes sense. For those less familiar with the 10 stages, I struggle with how best to convince you of the merits that this multi-step approach offers. So I've decided that the easiest way is to simply "make you an offer you cannot refuse." We'll make our 2-disc instructional blue ray DVD available at a discount of 65% ($49.95).
Finally, the most important tool is your charts. Vladimir Putin can spin his propaganda campaign, but the focus needs to be on what he actually does, not on what he says. The same is true in the stock markets. Remember that it's an auction market where buyers and sellers are brought together and essentially vote using their real money with the result being a price chart. They cast an average of 6 Billion votes in a trading day. In statistics, this is called a "statistically significant sample size." Regardless of what the media proclaims, what talking heads shout or the financial fundamentals may report, all of these factors are reflected in the price chart of an equity in question. In other words, your charts won't lie to you. Trust what you see — not what you hear or read.
As I've repeated so many times before, the stock market is the world's most sophisticated disinformation machine ever created. Trust your charts.
Trade well; trade with discipline!
Gatis Roze, MBA, CMT
- Author, "Tensile Trading: The 10 Essential Stages of Stock Market Mastery" (Wiley, 2016)
- Developer of the "Stock Market Mastery" ChartPack for StockCharts members
- Presenter of the best-selling "Tensile Trading" DVD seminar
- Presenter of the "How to Master Your Asset Allocation Profile DVD" seminar