How can the individual investor find and interpret the best sources of information? The Internet is rich with material. Is it too rich?
Investors have so much information that they cannot read it all. Suppose you are an individual investor, encouraged by television advertising to make your own decisions. You look at the list of the leading financial blogs and start reading. Many of the sources highlight each new data point, encouraging the investor to make decisions on this basis.
This is fine if the investor has a perspective on fundamentals –forward earnings of stocks compared to the principal alternatives — bonds and real estate. Lacking this perspective, the potential investor in stocks gets a plethora of repetitive information about what is wrong. Not all economic indicators are reflected.
Most readers do not follow the LINQCRED method that we recommend. They read headlines and interpretation without doing their own analysis. They also do not question the expertise of those interpreting for them.
A Case in Point
Last week we met with a potential investor, typical of many with whom we talk. We discussed our programs — one based on fundamentals and the other based on system trading. Both have strong records versus the S&P 500 for our history of nearly ten years.
The potential investor likes to read things online, and made a revealing comment. He said, "I like to keep track of the things I should be worried about."
This is the key. The investor is not looking for opportunity when everyone is worried. He is joining the worry. Those reading Internet information must have a framework for analysis or they will certainly go wrong.
An Objective Source on Housing
Anyone paying attention knows about housing problems. The Bearish Broadcasting Network, which we
recently spoofed, makes sure that each new data point gets plenty of attention.
- A story on foreclosure trends. The headline is that month-over-month there is a 5% decline. Foreclosures are still up 469% over last year. Take a look at the table in the article. Which view provides new information?
- A story on the decline in ARM mortgages. There are plenty of resets to come, but this is still new information. Once again, look at the helpful chart.
- A story on the improved credit profile of Orange County residents. This means that there are qualified buyers, when and if the credit freeze-up gets improved.
- A story on the decline in mortgage rates. This will help those trying to refinance or to afford new purchases.
There are potential buyers for homes. They may not qualify for the same level of loans that they did a year ago, but the bidders are there. Prices need to decline to clear the market. This will happen — gradually — as mortgage lending conditions improve and sellers make realistic offers.
Everyone understands that there is a housing problem. The questions are how quickly it will be resolved and what needs to happen to get there. When businesses have a high inventory, they clear it by reducing price. The process of price discovery in housing will eventually happen.
Meanwhile, the information on the impacts for investments in stocks seems heavily tilted, reflected in the heavy discount of stocks compared to bonds or cash.