Guest Author - Guido Deboeck

The other day we were invited at the home of niece couple, both in their mid forties; he is an aeronautical engineer employed by the navy, she is an artist who recently took an interest in investing. After some polite conversation the husband, who claimed he had difficulties with filling in tax forms (who does not?), wanted to bring the conversation to investments. His wife is taking care of the investments since according to him “he could not even balance his check book”.

He was curious as to what I read and how I used news. He immediately followed up by showing off his understanding of the current events and mentioning the war in Iraq, the rise of the oil prices, the growing trade deficit, the decline in the popularity of the President, the bird flue danger. He wondered how all that plays in the markets and how anyone could absorb all the news and figure out what to invest in.

It actually was a pretty good question because many people make the assumption that news determines the trends in the markets. At one time, when I was much younger, there was a school of thought that claimed that all the information is already in the markets and therefore all financial markets were efficient – the so-called efficient market hypothesis--. As a result of this the claim was that no one could outperform the markets. In the early 90’s my friend Edgar Peters wrote a book on Chaos and Order in the Capital markets which clearly rejected that claim. Later in my own book on Trading at the Edge (John Wiley & Sons, 1994), I included a chapter on chaos in financial markets. The efficient market hypothesis school of thought has long been contradicted. Several investment managers as well as private individuals have over time demonstrated that there are inefficiencies in the market and that outperforming standard indices like the S&P500 is quite achievable.

Back to the question on news: I told our host that I do read the New York Times and the Washington Post on a daily basis, but this reading was for entertainment not as an input to decision-making. I also subscribe to the Wall Street Journal, but there again, if I read any articles in the Journal it is out of intellectual curiosity. The Wall Street Journal does not offer real practical investment advice. The only paper that I use frequently (you should read ‘daily’…) is Investors Business Daily.

When I first started day trading in 1999 and throughout the period of the market decline from 2000 to October 2002, I also listened to CNBC. The TV was on constantly feeding me news on world events that had little or no relevance. Nowadays, I still have CNBC or Fox News on during the day, but the sound is most of the time on Mute unless there is an interesting interview or development.

To filter noise, meaning all the news that has no impact on the markets, and to avoid listening to “talking heads” on TV can contribute a great deal to improving your investment performance. The other talking heads you should Mute is all the free advice you can get from friends especially those that are experts on making sense out of all the conflicting news.

As you become more familiar with Investors Business Daily, as you learn to read the direction of the markets, and learn to interpret price and volume information, there is no need for knowing or even trying to decipher how the news influences the markets. Stock prices and volumes tell all there is to know. If a stock price increases more than the markets and the volume jumps 50% or more above its daily average, you know what to invest in. If institutional investors move big money into a stock (which you can detect by looking at the volume of transactions), they show you the path to follow. All you got to do is follow the trail!