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How to Read Financial News
Dan Pickett
/ Categories: Company Analysis

How to Read Financial News

In How to Read Financial News Redux: Process Determines Priorities, Martorana starts with a description of how he contributed to developing narratives that “explain” price moves when he was a young analyst. Later, when he became a portfolio manager he learned “that stock prices already reflected expectations, and market prices absorbed news faster than I could trade. I also learned that current trends affected current analysis, so reading more research did not help me make better decisions. News is descriptive in nature, not predictive, and this makes all the difference. Yes, I still had to read consensus estimates to understand investor expectations. And I still had to read the news to help me understand current events. But I was reading more and learning less, and I felt overwhelmed by information.”

This consistent with the emphasis we place on understanding the key drivers of a company’s business, so we can better interpret current trends as well as anticipate how companies will perform over time. Seeking alternative information sources that help us understand the business has a much higher return on time than watching CNBA or reading the 4th sell-side analyst review of recently reported EPS.

Martorana also references another article he wrote, How to Read Financial News: Tips from Portfolio Managers, which offers solid suggestions. He quotes a portfolio manager who notes that most research is backward looking and much of what is written tends to simplify and/or exaggerate, making it difficult to distinguish what is important. He lists the following best practices, which I paraphrase below (and are pretty good).

  • Understand the consensus – you need to understand what the market expects and is priced into a stock in order to know whether your view, if correct, is likely to cause the stock price to change.
  • Seek disagreement – understanding the alternative view can help you focus your research and analysis. For every stock trade there is a buyer and a seller, i.e. someone who thinks the stock will go up and someone who doesn’t. I spend as much or more time resarching the alternative view than my own.
  • Question the narrative – Martorana refers to the media here and quotes a research director “Reading too much financial news is counterproductive. The narratives are often incomplete, misleading, or flat out wrong.” More generally, consider the potential bias of the information source, e.g. is the analyst writing a bull (or bear) on the stock; that might influence how they characterize information.
  • Respect the data – make sure the data aligns with the narrative (a key message in Aswath Damodaran's terrific book, Narrative and Numbers). Go directly to the sources of charts and data tables to get a more complete picture.
  • Avoid partisan interpretation – Martorana refers to the importance of being apolitical when interpreting the news. More generally, it is important to consider new information objectively, i.e. try to avoid confirmation bias.
  • Develop your own framework – have a plan before you begin your reading. This is very much consistent with using a key drivers framework for honing in on the most important factors to consider when looking at a particular company.
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