Filtering Out the Short-Term Noise

Richard Bernstein, Chief Executive and Chief Investment Officer of Richard Bernstein Advisors recently published an article titled, “Ignore the Tweet, Invest for the Meat”, where he laid out the case for investing for the long-term while filtering out the short-term noise/news cycle. Below are excerpts we found interesting, as Madison also believes focusing on the long-term fundamentals are truly what creates value.

“We wrote a white paper in November 2014 titled “Tired of being scared yet?”. We outlined 50 different topics investors consistently cited at the time as to why the stock market was very risky. Investors’ fear over the past several years led to near-historic flows into bond ETFs and bond mutual funds and, until more recently, outflows from equities. However, the S&P 500® returned 10.2% per year versus bonds’ 1.5% from November 2014 to May 2018 (see Chart 1).

CHART 1: (source: FactSet)

Investment decisions should not be based on whether there are reasons to be scared because there are always reasons to be scared. Rather, investors must assess potential returns versus that ever present fear.  Successful financial investment and corporate capital investment has always depended on insightful risk/return analysis.

Today, investors seem bombarded with a daily flow of “hair on fire” events. Whether it is trade, international relations, oil, emerging market problems, interest rates, or many other issues, it has become extraordinarily difficult for investors to sift through the incessant noise to uncover true investment information. Reading Twitter posts and reacting to every news event every day seems to us at RBA to be a sure route to investment underperformance. We prefer to stay disciplined and dispassionate, and invest based on fundamentals rather than noise.

One antidote for noise

It seems hackneyed to suggest that longer investment time horizons are beneficial to investment returns. However, it is true. The data clearly show that rapid-fire trading leads to inferior performance. Chart 2 shows the probability of a negative return for the S&P 500® for varying time horizons. The probability of losing money uniformly decreases for each longer time horizon.

Economies simply don’t change day by day. Therefore, risk decreases as one extends investment time horizons probably because longer time horizons allow fundamentals to develop, whereas short-term investing is largely based on meaningless noise.”

Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. The opinions expressed herein are those of the named advisors at the time written.  Actual economic or market events may turn out differently than as presented. This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product.