Evaluating News for Investing

The world is constantly changing around us. As investors, it’s our job to keep up with our environment and always stay updated on news and information that affects capital markets. This is a guide to examining current events that affect public companies and how to use this to reach an investment decision.

Supply and Demand

The price of a stock moves up and down because of fluctuations in supply and demand. If more people in the market want to buy a particular stock, its price will increase. Conversely, if more investors want to sell their shares relative to demand, the price will drop. This correlation between supply and demand is the reason why the stock market can experience volatility in a short period.

Investor Psychology

When looking at how current events can affect stock prices, it’s important to understand the difference between investors and speculators. Investing concentrates on the quantity, quality, and timing of the cash that you get back from your holdings. Speculation is worrying about what others will pay you for your holdings. Investors view stocks as fractional ownerships of an underlying business. On the contrary, speculators overlook the fundamentals in valuing a stock price and instead focus on how the market will act. Investors take long-term positions and give less attention to predicting short term movements. However, speculators obsess over predicting the direction of stock prices.

These categorizations are extreme but are nevertheless two significant components of investor psychology. With speculation being an increasingly prevalent nowadays, investors tend to overreact to new information. One reason for this is herd behaviour: the tendency of a person to follow the actions of a larger group even when they would not make that same choice alone. Even if you are convinced that a particular idea or course of action is irrational or incorrect, you might still follow the herd, believing they know something that you don’t.

An example of this would the IPO of tech unicorn, Lyft, in 2019. When Lyft priced its IPO at $72 per share, it was valued at $24 billion. This optimistic valuation took into account the fact that Lyft is at the forefront of a massive change in tech and transportation with its unique ridesharing service. Despite this, the company is losing a lot of money — almost $2.3 billion over the last three years.

From when the stock was first offered to now, its price has plummeted over 40%. It was clearly overvalued because the market speculated massive gains from the company in the future. Especially big asset management firms like JP Morgan, who led the Lyft offering, hyped its value for many months leading up to its IPO. When investors realized the extent of this overvaluation and the company’s financial performance failed to meet high expectations, quarter-over-quarter, the stock price dropped for an extended period.

When the market moves very quickly in a certain direction, it is usually because investors are fearful of losses or strongly anticipate large gains in the future. Either way, the market doesn’t skip a beat because it is extremely sensitive to changes in the environment.

This is why the price of a stock can be impacted in a short period as a result of company news and recent events.

How Do News Affect Stock Prices?

Negative news will usually cause investors to sell their shares. Poor earnings reports, weak corporate governance, fraud, economic and political instability, and natural disasters are among various examples of negative news. Unfortunate occurrences translate in to selling pressure and lower a stock price.

Positive corporate news influences investors to purchase stocks. Good earnings reports, increased corporate governance, new products, acquisitions, and overall positive economic and political conditions lead to buying pressure and an increase in stock prices.

For instance, the US-China trade war has caused a great deal of uncertainty in the Chinese market. In late August, US President Donald Trump announced a duty on some $550 billion of targeted Chinese goods, just hours after China unveiled retaliatory tariffs on $75 billion worth of U.S. goods. The result of this news was the Chinese Yuan dipping to an 11 year low and Hong Kong’s Hang Seng index slipped 3.2% the next day. The threat of further restrained US-China trade relations caused speculation that Chinese companies relying on these exports would fail to meet financial expectations. Investors thus streamed into the safe harbours of sovereign bonds and gold. The news of Trump’s announcement is an example of negative news causing fear in the Chinese stock market.

Unexpected News

The only way significant changes in the market can occur is if negative or positive news events are unexpected. The market is always building on future expectations and new information is constantly being factored into a stock price. Additionally, many day traders and investment firms employ algorithmic trading strategies on supercomputers, virtually eliminating the chance for mere mortals to make money on short term trading. Thus, it’s extremely difficult to capitalize on the news unless you exclusively take advantage of nonpublic and confidential information… which is a felony known as insider trading.

You can either follow the general trend in the market and speculate short term movements in stock prices, or focus on growth investing and long term positions based on your findings. With a long position, you’d have to research long-term company strategies (ex. product line reveals) or news that affects an entire industry (ex. a new entrant).

Let’s go over an example of a current news story and how to analyse it for investment purposes.

Disney+

One huge recent event was the release of Disney+ on November 12, 2019. Disney’s new video streaming platform attracted over 10 million subscribers in just the first day of service. To grasp this number, this milestone took HBO about four years to reach.

Disney’s top media brands like Pixar, Marvel, and Star Wars are all included in the service which has a highly accessible price of $8.99 per month. Also, Disney reached a marketing decision with Verizon Communications Inc. where up to 19 million of its phone and internet customers would get one year of Disney+ for free.

This launch offset the steady decline of over 11% of Disney’s stock from the start of August to the end of October. In just 6 days (Nov 6 to Nov 13), the stock shot up 13.29%!

Disney+ is an ambitious attempt to compete with Netflix and other online streaming services. It’s users spent 1.3 million hours last Wednesday watching content on the service. While this is much higher than Amazon Prime video, Disney still has a long way to go to reach the upper echelon of Netflix — which averages 6 million hours of viewership per day. Nevertheless, Netflix stock dipped almost 4% from Nov 11 to 13 in response to the skyrocketing success of Disney+.

Analysing the Situation

How can you use this news to your advantage as an investor? Firstly, this was a completely expected event since Disney had announced its plan to release the service since last year. The launch had been somewhat factored into Disney’s stock price, as well as that of its competitors.

If you were specifically looking to buy Disney stock for short-term gains, you’re a little too late. The best time to buy shares would’ve been any time during October. The price had dipped to a yearly low around this time and went up 13% at the start of November. Another factor to consider when looking to profit from short term stock gains based on recent news: forecasting demand over time. The best time to sell the stock would be right when everybody knows about the news and wants to jump in on the trend — so around November 12th.

Short-term trading isn’t often recommended for beginner investors because of the high risk involved. Speculation into market patterns and trends is usually the bulk of what short-term traders do to determine an investment strategy. If you’re participating in a guessing game, there is a great chance that you will lose.

When reviewing a news story, try to also look at its long-term implications. Instead of speculating, you can factor recent company events with your fundamental and technical analysis to forecast the performance of a long position.

When looking at the long-term implications of Disney+, you should evaluate how significant an entity it even is for a giant conglomerate like Walt Disney Co. The company has a very wide range of business segments, reported a total equity of 53 billion and a net income of 13 billion in 2018. Even without much data on the value Disney+ adds to Walt Disney Co., it is safe to say that as of now, its impact is pretty small because the service is relatively new.

When considering this news as a factor for purchasing Disney stock, you have to dig deeper with supplementary research to discuss how Disney+ will affect the company as a whole in the future. Especially in a financial analysis report on Walt Disney Co., it would be key to mention this in a section highlighting future drivers of growth or even in a SWOT analysis.

Where to Find Company News

The following sites provide the latest and most accurate information in finance:

• Marketwatch News Viewer
• Bloomberg Portal
• Reuters
• The Wall Street Journal*
• The Financial Times*
• Seeking Alpha
• The Motley Fool

*Require paid subscriptions

These sites give broad coverage of stock-specific, sector-specific, and market-specific news on their web portals. They also have up to date information on global markets for stocks, commodities, forex, and other asset classes, including fundamental analysis and reporting of macroeconomic data at a country level.

Conclusion

One important takeaway is that recent news isn’t nearly enough information to base an investment decision. As Warren Buffet famously said, “risk comes from not knowing what you are doing.” Recent news should be one of numerous factors that influence your decision. Create your valuations and forecasts based on technical analysis and quantitative information. Fundamentally, ensure that you have a holistic view of the company’s history, where it is at now, and what it can feasibly accomplish in the future. To prepare yourself for risk, be aware of the best and worst case scenario for your stock portfolio. And as always, stay informed!

Key Takeaways

1. Stock prices fluctuate in the short term due to supply and demand
2. Investors view stocks as fractional ownerships of underlying business
3. Speculators focus on how the market will act
4. The market is highly sensitive to news due to speculation
5. New information is constantly being factored into a stock price
6. Unexpected events cause the most disruption in the stock market
7. It’s extremely difficult to profit in the short term from recent news
8. Analyse news stories holistically and address the extent of uncertainty for the future
9. Recent news is a small factor that contributes to your final investment decision — employ other valuation and analysis methods as well

Next Steps

1. Share this article with anyone you think might be interested 🧐
2. Follow me and the InvestBETA publication on Medium for more content like this 😃
3. Go follow @InvestBETA on Instagram for youth-driven investment events and opportunities 📈
4. Check out my Instagram @navdeep03gill for the spiciest content
5. Don’t hesitate to DM me about any questions or if you want to talk about greek philosophy! 🤔💭❓