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The Acorn
January 15, 2016
What Does a Headline Really Tell Us?
A Headline - words in large letters at the top of a story that serve as a title
and give us some idea about the content of the article to follow. Good ones
grab our attention and make us want to read the story.
Financial headlines grab us by mixing some psychology along with
economics. Actually, there is a whole field of science that studies how we
react to those headlines when combined with other news. It’s
called the field of behavioral economics. The study offers a framework for
how people frame economic outcomes; how potential gains and losses
affect our economic decisions and choices.
One conclusion that students of this particular discipline have come up
with is… (drum roll)…
People dislike losses. That sounds simplistic, but the conclusion has
far-reaching implications in portfolio design. People try harder to avoid loss
than then try to achieve equivalent gains. Simply put, we focus more on
avoiding what hurts than we do on achieving what might feel good.
To bring this idea full circle, that’s why headline writers use the language
they do. The negativity sucks us in like a moth to a flame. Here is a recent
example:
“US Stocks Dive at Opening as Global Markets Slide”
- Associated Press, January 15, 2016
Words like “dive” and “slide” are not put there to inform. Rather, their sole
purpose is to generate a response based more on emotion than reason. If
we are able to separate how this makes us “feel” from what it might mean
in the short term to our investment portfolios, we can examine the facts
and come to this conclusion:
The longstanding growth in the Chinese economy that fueled construction
and manufacturing in that country for the past ten years has slowed
down. Stock markets in China, Europe and the United States are uncertain
exactly how that will impact the profitability of companies and the demand
for goods and services in the future. This uncertainty has created the
volatility we are feeling; however, and most importantly, we do not think
“this time is different.”
Investing should be more like watching paint dry or watching grass grow.
Unfortunately, from time to time the setbacks are part of the journey and
can be something uncomfortable to watch.
Looking at history, we see the setbacks were temporary and the
expansions longer-lasting.
Let’s take a look at two other headlines from last year and try to figure out
which was most important. How you answer will depend a lot on the
headline. Did it appeal to your emotions or your intellect? Sadly, most
financial news stories today appeal to the former.
The first was portrayed by the financial media as a reason for the potential
breakdown of global markets:
“The deadline for Greece's bailout deal expires today and the
country is running out of money. If Greeks vote "no" to an austerity
plan this weekend, Greece could be forced to drop the euro as its
currency.”
- CNBC
The second was a landmark day of one of the greatest forces propelling the
accretion of real wealth by the largest number of people in the history of
the world:
Lowell Wood, an astrophysicist from California surpassed Thomas
Edison, becoming the all-time most prolific inventor from the United
States based on number of issued U.S. utility patents.
Here’s what the financial media always forgets to remind us. During the last
40 years, the world is better off because of the spread of the global free
market economy alongside the exponential progress in invention and
information technology. Together they have brought an unprecedented
abundance to the world. To understand this, let’s explore a less traveled
road of perspective of newsworthy events.
We’ll begin in 1975, a year many of our clients began investing for their
future.
1975
Saigon falls. President Ford escapes two assignation attempts within
seventeen days. Margaret Thatcher becomes the first women leader of
Britain’s Conservative Party. Andrei Sakharov, the great hero of Soviet
resistance, wins the Nobel Peace Prize. Saturday Night Live debuts on
television.
An American and Soviet spacecraft link up in space; the event is
memorialized on a beautiful ten cent US postage stamp.
Global population: 4.1 billion, nearly half of whom lives in extreme
poverty
US population: 216 million
US real Gross Domestic Product (GDP) stands at $5.49 trillion (GDP is a
monetary measure of the value of all final goods and services produced in
a period of time, typically annually)
S&P 500 Index (a good measure of the overall US Stock Market) closed at
90.19 with earnings per share at $7.71 and annual dividends at $3.73 per
share
1985
Gorbachev comes into power in the Soviet Union and meets President
Reagan. The internet domain name system is created. Windows 1.0 is
published and the first successful human heart transplant takes place. The
song of the year is “We Are the World”.
A first class US postage stamp costs twenty-two cents.
Global population: 4.85 billion
US population: 238 million
US GDP $7.71 trillion
S&P 500 closed at 221.28 with earnings of $15.68 and dividends of $8.20
per share
1995
The Oklahoma City bombing is the greatest domestic terrorist atrocity in
America history. O.J. Simpson’s murder trial begins, ending ten months
later in his acquittal. Israeli Prime Minister Yitzhak Rabin is assassinated.
The Rock and Roll Hall of Fame opens in Cleveland, Ohio. Jerry Garcia dies.
A postage stamp now costs thirty-two cents.
Global population: 5.7 billion
US population: 266 million
US real GDP: $10.28 trillion
S&P 500 closed at 615.93 with earnings of $37.70 and dividends of
$14.17 per share
2005
Hurricane Katrina devastates an American land mass larger than Great
Britain. Saddam Hussein goes on trial for his life. July 7th becomes
London’s 9/11 as coordinated attacks on the bus and subway system
claim 52 lives. Pope John Paul dies; he will be canonized only nine years
later.
A postage stamp costs thirty-seven cents.
Global population: 6.5 billion but, by the turn of the century, the rate
of extreme poverty has fallen to one person in three
US population: 296 million
US real GDP: $14.37 trillion
S&P 500 closed at 1,248.29 with earnings of $76.45 and dividends of
$22.38 per share
2015
Radical Islamic terrorist faction ISIS casts the Middle East into chaos and
carries out terrorist atrocities in Paris and elsewhere. Refugees pour into
Europe. The world-leading nations reach an accord with Iran on its
nuclear development program. Yogi Barra dies.
A postage stamp costs forty-nine cents.
Global population: 7.29 billion, less than one in ten live in extreme
poverty
US population: 322 million
US real GDP: approximately $16.30 trillion
S&P 500 closed at 2,043.94 with estimated earnings of $188.00 and
dividends of $43.00 per share
This, then, is the tale of four decades (approximately an investment
lifespan):
Global population up nearly 80% with extreme poverty slashed
from one human in two to one in ten.
US population doubled, gaining a new person (through net births and
migration) every fourteen seconds. And still almost unimaginable
room to grow: population density per square mile in this country is 85,
compared with almost 300 in France, 590 in Germany, 680 in the
United Kingdom and 870 in Japan. Staggering natural resources, with
mineral rights vested in the landowner. A hundred years’ worth of
hydrocarbon energy reserves.
Real GDP more than tripled.
The S&P 500 rose more than twenty times, on an earnings increase of
fifteen times and a dividend boost approaching twelve times.
At Charter Oak we see a foundation for the future in these building blocks of
the past; first in the global spread of free market economies as liberty
vanquished communism and most extreme iterations of socialism during this
period, and second in the exponential progress of invention and
information technology in everything from biotechnology to computing
power.
Consider this: in 1899, Charles H. Duell, Commissioner of the US Patent
Office, wrote a letter to then President McKinley proclaiming, “Everything
that can be invented has been invented.” Today the iPhone 6 has more
computing power than the Apollo 11’s first manned mission to the moon!
(Too bad the astronauts didn’t have those mobile phones or selfie sticks.)
What the media will never tell you is that the persistence of these trends are
vastly more important to your future than their fleeting daily headlines and
dire warnings. We encourage investors to embrace the larger perspective of
the global economy, to the fortunes of the great companies and capital
markets everywhere. Most of your connections don’t know any of this, so
we encourage you to share this with your friends and family!
Lest we forget what is most important in life this January, we wish you all a
2016 filled with health and happiness (and prosperity too)!
P.S. What’s in store for the future of the world economy? Let’s hope for
more of the same.
Securities offered through Purshe Kaplan Sterling Investments, Member FINRA/SIPC.
Headquartered at 18 Corporate Woods Blvd., Albany, NY 12211.
Not FDIC Insured. Not Bank Guaranteed. May lose value, including loss of principal. Not insured by any state or federal
agency.
The Acorn is written each week by the professionals of Charter Oak Capital Management exclusively for its clients. If you
have questions or comments about anything you read here, or if there is a particular topic that you would like to see
addressed, please let us know.