Make Decisions on Prices, Not Headlines
Exencial Wealth Advisors
Exencial is a leading independent wealth management firm providing leadership to our clients.
By Tim Courtney , Chief Investment Officer
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While the “Information Age” has a nice ring to it, living in the modern version of it is nonstop cacophony. We are oversaturated with information and opinions about it. But is this information helpful or even actionable for investors? Much of it is not.
The recent back-and-forth surrounding tariffs is a good example of how quickly circumstances can change and how difficult it can be to render information into actionable trades. Over the last month you could not escape tariff headlines. Tariffs have been on, delayed, then back on, then modified.1 Trading around this news has proved difficult. Still, many companies set up "war rooms" in a vain attempt to correctly guess how the U.S. would act, how trading partners would react, how consumers would react, and then how the U.S. would react to their reactions.
This reminds us of the scene from “The Princess Bride,”2 where a kidnapper is presented two seemingly identical cups of wine, one of which is poisoned. As he decides which cup he will choose, he explains in great detail how he knows which wine is safe to drink. He makes his choice, drinks and, after some self-congratulation and laughter, dies. Many times, knowledge and information is not actionable–there are too many variables for the future to be known.?
Take inflation and the Federal Reserve (Fed) for another example. The Fed thought they had inflation beat in September, and they decided to ease interest rates lower.3 In a frustrating change of events, inflation then began four consecutive months of increases back up to 3%, which forced the Fed to halt cuts.4 During this time, as investors tried to guess what the Fed would do next, expectations of rate cuts went higher, then lower, then higher again. Inflation changed, and that change causes reactions, and, as the chain of reactions continues, it’s impossible to know how it will end.
So, while much of the information we are surrounded by is not sufficient itself to be actionable, there is some information that is actionable: prices. Prices reflect the consensus of millions of market participants and are the most definitive piece of information we have as investors. When the market is made aware of information, participants incorporate that data into prices quickly.
This is not to say the prices are “right.” Sometimes prices are demonstrably wrong, as was the case in April 2020 when oil futures traded at -$37a barrel.5 While many investors that day were selling based on the informational noise of recession, EV growth and diminishing demand for oil, the investors who acted based on the price of oil and bought that day experienced the best return by far of any broad asset class since that time.?
Markets take vast, noisy conversations and simplify them into a price. Rather than making decisions based on headlines and noise, we ideally make stock, bond, options, real estate, etc. decisions based on prices. It is what we call being an accommodating investor—paring assets the market wants when prices are high and adding assets the market is less interested in when prices are low. If you have questions about how this works in your portfolio, please reach out to your advisor.
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