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Why You Shouldn’t Live In Fear About Bad News For Investing

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A look into how the stock market interprets bad news

Consider the last 100 years.  There were two World Wars which was followed by a Cold War threatening mutually assured destruction.  You can also throw in a Great Depression in there.  You have all these new stories which are much worse than today (25% unemployment during the Great Depression)  but the market recovered  in 1932 while the market was still collapsing.

See why bad news shouldn’t effect the way you invest.

What’s going on here? It’s not war profiteering by greedy capitalists. The reason stocks rise when things seem gloomiest—and this is a crucial point—is that the market doesn’t reflect today’s news. Instead, it looks ahead and anticipates how things will turn out tomorrow.

The market already has the news built into via the discounting mechanism.  That means when you read the news it’s already in the market and usually imperfectly but the market has already reacted.  This is why trading on news stories can be very hard.  Instead you should think about a company’s valuation or what industry might revolutionize the world.  Imagine picking Apple when it was $80 a share back in 2007? (AAPL was around $15 in 2007 when normalized for stock splits.)

Learn about the discounting mechanism and how the US economy has always recovered.

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About Shaun Archer Tatum Shaun works in corporate finance in New York City. He has done financial consulting for several start-ups and has worked at several Fortune 500 companies. He has contributed several finance/investing articles on Seeking Alpha which have been published on Yahoo! Finance.

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