Stordahl Capital Management’s Evidence-Based Investment Insights: Insight #2: Ignoring the Siren Song of Daily Market Pricing
In “You, the Market, and the Prices You Pay,” we explored how group intelligence governs relatively efficient markets (as well as jelly beans) in an imperfect world. Next, let’s look at how prices are set moving forward. This, too, helps us understand why traditional active investors face a steep hurdle by trying to compete against rather than participate in efficient markets.
News, Inglorious News
What causes market prices to change? It begins with the never-ending stream of news informing us of the good, bad, and ugly events that are constantly taking place. For example, when there are reports that a fungus is attacking Florida trees, orange juice futures may soar, as the market predicts there will now be less supply than demand.
But what does this mean to you, your investment portfolio, and every investor’s quest to buy low and sell high? Should you buy, sell, or hold tight to your juiciest investments?
Before the news tempts you to chase or flee active trends, it’s critical to be aware of the evidence that tells us the most important thing: You cannot expect to consistently improve your outcomes by reacting to breaking news.
Great Expectations
How the market adjusts its pricing is why you cannot do much about breaking news. There are two principles to bear in mind here.
First, it’s not the news that moves the price; it’s how it impacts our expectations. When a security’s price changes, it’s not whether something good or bad has happened. It’s whether the news is better or worse than expected. If it’s reported that an orange tree disease is continuing to spread, pricing changes may be minimal if everyone is already bracing for ongoing doom and gloom. On the other hand, if an ingenious new fungicide is announced, prices may change dramatically in reaction to the lucky break.
Thus, it’s not just news, but unexpected news that alters future pricing. By definition, the unexpected is impossible to predict. So is how, and how dramatically (or not) market players respond to it. For example, what’s good news to one industry may be bad news to another. Once again, group intelligence gets in the way of those hoping to outwit others by consistently forecasting future prices.
The Barn Door Principle
Another reason to consider breaking news irrelevant to your investing is what we’ll call “The Barn Door Principle.”
By the time you hear any breaking news, the market has already incorporated it into existing prices, well ahead of your ability to act on it. The proverbial horses have already galloped past your open trading door.
This is especially so in today’s electronic trading and social media broadcasting world. Prices are set and re-set nearly instantaneously as fresh news arrives.
In other words, unless you happen to be among the very first to respond to breaking news (competing, mind you, against automated traders who often react in fractions of milliseconds), you’re setting yourself up to counterproductively buy higher or sell lower than those who already have set new prices based on the news.
Your Take-Home
Avoid trying to play an expensive game of market whack-a-mole based on ever-evolving information and cut-throat competition over which you have no control. Instead, position your life savings to benefit from greater market efficiencies.
If you want to discuss this concept further, we offer a complimentary 15-minute call to answer your questions and to share how we can help.
This material was written in collaboration with artificial intelligence (ChatGPT) and derived from sources believed to be correct.
This information should not be construed as investment, tax, or legal advice. This commentary reflects the personal opinions, viewpoints, and analyses of the Stordahl Capital Management, Inc. employees providing such comments and should not be regarded as a description of advisory services provided by Stordahl Capital Management, Inc. or performance returns of any Stordahl Capital Management Inc. Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Accessing websites through links directs you away from our website. Stordahl Capital Management is not responsible for errors or omissions in the material on third-party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third-party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites. Please note that trading instructions through email, fax, or voicemail will not be taken. Your identity and timely retrieval of instructions cannot be guaranteed. Stordahl Capital Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.