Markets Pre-Price Everything
The next time you think you know something that the market doesn't know, give that some serious consideration. Gallup polls estimate that 56% of the American public own stock in some form, suggesting that there are 185 million stock owners in the U.S. That's a lot of folks keeping an eye on financial news.
Although it may occur from time to time, insider trading is illegal. Companies are required by law to distribute their information via designated channels to assure equal access to information. This is why, by far, most financial information is readily available to everyone.
In the current era, both business and non-business news is instantaneous and available from multiple sources - television, radio, newspaper, magazine, the internet generally and social media specifically. Millions of investors have access to this information and then take their own self-determined investment actions based on this relentless flow of news. Investors and computer algorithms are consistently gauging and adjusting their investment posture based on how they interpret this steady stream of news. Some zig, while others zag - all based on the same information. This includes your neighbors and the guy and gal on Twitter.
This constant flow of news is also why in recent months markets had already priced in the probability of war. When invasion occurred, markets then priced in the risks of ongoing war. We're talking decision-making in milli-seconds for some tech-oriented trading firms.
Then, of course, markets priced in the potential for Federal Reserve rate hikes this year, the first of which occurred recently. And then beyond that, how many fed rate hikes will occur in the next year. All of these details are priced into markets before readers get to the "old school" paper version of the Wall Street Journal. If you've read it or seen it, assume that tens of millions have seen the same...and have already acted on that information, which then prices that information into markets.
Whatever you read or see or hear, if it is widely disseminated information, markets have already priced it, which then chips away at the profit and advantage of acting on that information for overall markets.
Back in the Old Days...
Contrast this with news flow one hundred years ago. The ticker tape machine shown above spewed out reams of paper showing stock price changes and company news that would then have to be shared in the next days' paper or by phone call. Corporate financial results would often not be available until quarterly reports were filed weeks or months later, and investors would then have to go to the library to find and peruse that information. Markets were much less efficient in that era.
However, all is not lost in this pricing process. Consider whether all those nimble, fast-acting investors acting on this constant flow of information have profitable outcomes. A multitude of studies confirm that hyperactive market watchers and traders lower their long-term performance outcomes.(3) There is very little grey area here: excessive trading on readily available information is almost always counterproductive. Speed does not equate to better outcomes.
Remember that markets are forward-looking vehicles and care very little about what has happened, and much more about what will happen. And the future they focus most intently on is the next three to thirty months.(5)
If it feels compelling to react to today's news, remember three things:
- Frequent trading nearly always lowers returns.
- Markets are much more focused on the probability of future outcomes and care much less about historical outcomes. So keep looking forward.
- Our view is that mis-pricings (and opportunities) occur most frequently at the individual stock level because individual stocks are inappropriately forced up or down by overall market movements and over-reactions to corporate news.
