Investing With Clarity™ Blog

The Bottom Line vs. The Headline

March 18, 2016 5:29:03 PM

In the fast-paced, frenzied world in which we live, news sound bites can certainly add value as it pertains to personal productivity. Realizing that many of us seek to take in as little information as we can, while spitting out as much of it as we can, I do not fault media outlets as they are only providing us what we desire. However, where I do find fault is when an everyday investor reads a series of headlines, absorbs the data, extrapolates a thesis and believes they are an expert in the subject of economics and finance.

 

Lately, I have heard rhetoric such as:

  • “I am waiting until the Election is over until I make the decision as to whether I will invest or not.”
  • “I believe that there is a pending Terrorist Attack so I am going to wait until it happens to make that decision.”
  • “I want to see if Oil prices are going to continue to drop before I will invest.”

I read into the aforementioned comments the following:

  • I am a self-proclaimed Political Expert.
  • I am a self-proclaimed Military Expert.
  • I am a self-proclaimed Geological Expert.

 

When I hear an investor bombastically proclaim a “know-it-all” attitude, I will sometimes give into temptation and challenge them. A majority of these investors have no formal educational training in the field of Finance and Economics, but deem themselves knowledgeable not only as it pertains to investing, but also as to the inter-workings of the global markets with world events. When I challenge these self-proclaimed experts, I ask the following questions:


Imagine you are a passenger in the new Airbus A380 taking an exhausting 15+ hour flight from Los Angles to Sydney. As the big bird makes its initial descent upon landing in Australia, the captain steps out of the cockpit, approaches your seat and proceeds to tell you that he is too tired to land the plane and asks you to take over. Do you believe that you would have the expertise to do so?

Imagine you are in a hospital waiting room anxiously preparing for the outcome of a loved one’s triple bypass surgery. Suddenly, the cardiologist steps out of the surgery room, approaches you and proceeds to tell you that his hands are too tired to complete the surgery. He is about one-third into the process and asks you to complete the remaining two-thirds of the surgery. Do you believe that you would have the expertise to do so?

Imagine you are at the Houston Space Center on vacation visiting the exhibits. At the same time, the space shuttle is actually in orbit over the Earth’s atmosphere. Unbeknownst to you, the space shuttle veers off course and goes back into space due to a mechanical malfunction. The Head Rocket Propulsion Engineer at the Central Command Operations building at the Space Center, whose job it is to provide the astronauts an optimal reentry point and precise glide path to avoid the shuttle disintegrating on point of re-entry, all of sudden leaves his post, approaches you inside the visitor’s lounge and proceeds to tell you that it has been a long day and he needs you to step in and provide the crew with precise calculations in order to bring the craft safely back into Earth’s orbit. Do you believe you have the expertise to do so?


Obviously the answer in each of the three scenarios is NO... as pilots, medical doctors and engineers possess discipline in a subject matter that requires lengthy training. Moreover, most folks would say; “I would never attempt to do what they do, because they are experts and I am not.” However, for some reason, the professional discipline and skill sets of a being a portfolio manager, research analyst or wealth advisor are placed in the camp of being rather, should we say, remedial. In fact, some people believe that they cannot only do what we do, but actually do it better than us. Unlike the pilot of the jumbo jet, the heart surgeon or the rocket scientist, our field of endeavor seems to be one that is not only questioned by every layperson, but also frequently criticized to boot.

I believe the reason this occurs is that our industry seems to have an incestuous partnership with the media. Collectively, they seek to create a feedback loop (a cycle of behavior in which two parties each act to reinforce the other’s action) by focusing on stories that will generate viewership by creating a cult-like following. We are constantly duped into following the story lines of the day that usually manifest themselves around themes that center around politics, military action and central bank policy. While these events are important and have an impact on investments, what gets put on the media back burner is even more important: the critical, fundamental data, such as corporate earnings, dividend payouts, economic moat and industry market share. It is these statistics that drive long-term equity values. As an investor, you are a shareholder and as such, a business owner. And, true business owners focus on the bottom-line rather than the headline when making sound and rational decisions about the future.

A great example of the chasm between headline hyperbole and bottom-line reality is in February 18th’s reporting of the all-important issuance of the Conference Board’s Leading Economic Indicators (LEI). As far as we can gather the report was not highlighted on CNBC, spoken to on the Political Stump, nor mentioned or inquired about by clients in our meetings on February 18th. For those of us geeks who value its data, we were able to find a substantive article on advisorpersectives.com. The good news was that the outlet covered the story and analyst Doug Short did a great job in creating several charts that depict the contents of the report. What we did not find of value was the dichotomy between what the headline was and what the bottom-line was... here they are:

 

"Conference Board Leading Economic Index: Decrease in January for Second Consecutive Month"

Febraury 18, 2016

by Jill Mislinski

 

Headline: is suggestive that things are not so good, and if you know anything about the LEI, it is that LEI is a great predictor of recession.

 

Content: the report does show a slight decline in overall economy as presented in the adjacent chart (click to enlarge)... but tell me, is this really representative of the headline?

Bottom-line: the report goes on to highlight several very pertinent charts (assigning credit where it is due) but they represent a thesis different than the headline would infer, in that a consistent strong LEI has and continues to be the norm over the last year. If you sift through the reports (attached) and in the link below, it can be said that what brought down the LEI over the last month were two indicators:
 
  • S&P 500 Stock Prices – which dropped in January but have begun to rebound
  • Initial Jobless Claims - which slightly rose in January but have since dropped and sit near multi-decade lows (which is highly positive)

If these are the only two reasons to be concerned about the slight drop in the LEI, while the other eight factors are showing a positive effect, then the current headline of the report would not be reflective of the risk of a near-term recession. So what does the last line of the article actually say? See the highlighted portion of the bottom adjacent chart (click to enlarge):

The sad thing is how many actually read the entire report or the article for that matter to unearth the truth? Unfortunately, probably not many!

 

Click to Enlarge

Bottom-line... I will take the bottom-line over the headline any day, even if it takes a little “forensic work.”

 

 

 

 

 

For the entire article please click on the following link and thanks for listening!

http://www.advisorperspectives.com/dshort/updates/Conference-Board-Leading-Economic-Index


Mark Pearson

Mark Pearson

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