Every day, The Wall Street Journal publishes a "Stocks in the News" column highlighting five stocks that were up big and five stocks that were down big. There's an accompanying 20-word-or-less explanation of why said stock was up or down.
It's a great feature -- one we look forward to reading. Here's a sampling from recent "Stocks in the News" features:
||Oct. 27||+11.92%||Fiscal first-quarter profit jumped, and the leather goods company said it is in a good position for the holiday season.|
||Oct. 29||-5.25%||The consumer and industrial manufacturer said third-quarter profit jumped, but the company narrowed its 2010 profit target.|
||Nov. 4||-4.26%||Bank of America and PNC Financial said they planned to sell shares of the money manager.|
||Nov. 10||+1.07%||Never good news for drivers, but the climb in crude oil futures boosted oil shares.|
||Nov. 10||-14.92%||The provider of energy-monitoring services projected a wider fourth-quarter loss than had been estimated.|
Source: The Wall Street Journal.
By now we hope you're beginning to appreciate the genius of "Stocks in the News." In seconds, you get a company description and a simple explanation of the complicated monster that is the stock market.
Only ... it's never really that simple
Putting aside the fact that it's a slow news day when a 1.1% "mover" makes the cut, do rising crude oil futures really explain why Exxon shares rose on Nov. 9? Sure, it could have been a factor -- oil prices do matter to Exxon's performance -- but think about all of the forces pushing a stock's price. They include, but are not limited to:
- Earnings misses
- Changes in guidance
- Macroeconomic indicators
- Ben Bernanke's most recent pronouncement
- News about a product
- Comments from a major investor
- High-frequency trading computers
- News from Greece
- Jim Cramer
- News from China
- Election prospects
- Newsletter recommendations
- Insider trading
And so on and so forth. But back to Exxon: Why wasn't it up more given the rise in oil futures? One reason is that on the same day, investors were pulling money out of the stock market reportedly because of "queasiness" from the so-called QE2 -- a phenomenon reported on the same day by the same newspaper on the very same page as "Stocks in the News."
Easy answers = an oxymoron?
No matter how much we may desire them, simple explanations for short-term market moves simply don't exist. And it's always been that way. Consider Michael Lewis' description of this phenomenon in the 1980s from Liar's Poker:
Most of the time when markets move, no one has any idea why. A man who can tell a good story can make a good living as a broker. It was the job of people like me to make up reasons, to spin a plausible yarn. And it's amazing what people will believe. Heavy selling out of the Middle East was an old standby. Since no one ever had any clue what the Arabs were doing with their money or why, no story involving Arabs could ever be refuted. So if you didn't know why the dollar was falling, you shouted out something about Arabs.
So even though we enjoy the Journal column, we rarely (if ever) act on the information it contains. As long-term investors, moves in oil futures contracts, a 3% raise in quarterly guidance, or prospects for a joyous holiday season don't much matter to us. We generally look three to five years out, at a minimum, and update our valuations once a year (or perhaps two or three times if we've binged on coffee).
Our rationale is simple: Stocks move in the short term for all sorts of reasons, but in the long term, they tend to track the health and growth of the underlying business.
Investing can be fun, but it's not a game
Respected money manager Ron Muhlenkamp once wrote that the "game of the stock market" distracts us from the "business of investing." "We focus on the long-term 'Business of Investing' because we have found it to be more profitable and more reliable."
We agree. However, while we're not so sanguine as to say major daily price swings don't matter at all, if you've done your due diligence and understand the company fundamentals, they needn't raise your blood pressure (for long, at least).
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