Bad market reporting again

The Telegraph carries, inadvertently, a nice catalogue of errors in stock market reporting.

Error one is a US-centric view of market history. The Torygraph claims that the fall in the US market between 1929 and 1932 was “the greatest stock market collapse in history.”

As Tim Worstall rightly says, the St Petersburg market did worse in 1917. And this is not the only instance. This paper by Will Goetzman and Philippe Jorion points out that of 24 markets open in 1931, only seven continued to trade uninterrupted. The Hungarian and Czech markets shut permanently, and the suspension of the Japanese market between 1944 and 1949 was accompanied by a real loss of 95%.

Plenty of markets, then, did worse than the US in the Great Depression. This is no mere pedantry. Because the US market has been the world’s best performer over the long-run, investors who pay too much attention to it over-estimate long-term returns. Goetzmann and Jorion estimate that global markets in the 20^th century post annual real increases of just 0.8 per cent. Those that did better than this did so to compensate for the big risk of catastrophe.

The Torygraph’s second error comes in this piece, pointing out that October’s 5.2% drop in the FTSE 100 is the market’s “worst month of trading since before the Iraq war.”

What the piece doesn’t say is just how likely 5.2% monthly drops are. Bank of England figures suggest that, at the start of this month, investors thought there was a roughly 10% chance of such a move – and this probability was unusually low because implied volatility was unusually then.

“9 to 1 shot comes in” wouldn’t make the headlines on the racing pages. So why should it do so on the stock market pages?

A third error is giving credence to the waffle of self-appointed “experts”:

Analysts and fund managers in the City are relaxed. Most predict that this is merely a pause in the current bull market.

This tells us nothing. Shares are risky. They should therefore be expected to out-perform cash – that is, to rise. These experts tell us nothing that common sense couldn’t tell us. An interesting question is: is there any more predictability in the market than this? Neither the Torygraph nor the "experts" tell us.

A final error is another omission. There’s no proper analysis of this month’s fall at all. The question you should ask about any market drop is: does this reflect a genuine worsening in the outlook for profits and dividends? Or does it reflect an increase in the perceived riskiness of the market?

The difference is crucial. The former is a genuinely bad thing for investors. The latter, however, means that expected returns have risen, to compensate for the extra riskiness.

With market reporters unable to grasp this distinction, it’s no wonder that the dead trees urge people to buy stocks at the top of the market and sell at the bottom.

Comments

[Innocent Abroad]

Well, financial journalists don't get bonuses (or sacked, come to that) on the strength of their tips' performance.

It would be just as reasonable for me to manage my portfolio (if I had one) on the basis of the first and last letters of comments to this blog.

[dearieme]

I find that the financial pages are often a good source of the sort of news that probably ought to be on the news pages, but a pretty laughable source of economic or financial news, since their signal-to-noise ratio is so low.