Each day that the financial markets are open, they generate a massive volume of news. Earnings reports, economic numbers, CEO speeches, analyst comments, social media feeds, and breaking news can all impact investor sentiment towards a company or even an entire industry.
A headline could cause a short-term drop or rise, but it won’t really affect the business in the long run. On the other hand, a quiet, unobtrusive announcement might include details that significantly affect a company’s turnover, costs, or even its capacity for future growth. Mature and seasoned market participants, as a matter of fact, spend less time catching every update and more time learning the real story.
Focused On Understanding
One way to tell noise from meaningful news is to find an article that explains the event’s surrounding circumstances. Research reports that offer in-depth analysis can help investors understand whether a new situation is changing our perception or simply adding a fact to the known scenario. The AlphaWire publishes detailed analyses that, when combined with corporate communications, financial accounts, and even market commentary, can offer a comprehensive view. The main point of this kind of reading is not simply to catch the news, but to understand the numbers, trends, and developments that might otherwise go unnoticed.
After the analysis, investors will probably want to compare the results with the original data.
A company stating that revenue has been growing is typical, but investors will naturally wonder what drove that increase. Had the sales volumes increased, the prices raised, an acquisition happened, or was it just a particularly good quarter?
Find Out What Is Different
One of the easiest filters investors might use is: Do I know something now that I didn’t know earlier?
Beyond confirming something already common knowledge or market expectations, some news can cause a huge shift in expectations.
Say a company tells investors that, on average, it expects sales to grow by 10%. Later, they announce that growth will be slightly higher; say, they expect sales to increase by 11%. At that point, the company can expect some publicity, but the overall situation remains unchanged.
Suppose, on the contrary, the company suddenly announces 25% sales growth; then investors have very different data to consider.
The same logic can be applied to:
- Forecast of the revenue
- Level of profit margin
- Increase in the number of customers
- Capacity of production
- Debt level
- Major contracts
- Plans of expansion
Instead of focusing only on the news’ emotional tone, investors can identify changes in the company’s performance relative to initial expectations.
Distinction Between Facts And Opinions
Financial market conversations usually combine facts with opinions. A firm announcing 15% year-on-year sales growth is the fact. Saying that this shows the company is going through an era of incredible development is an opinion.
Understanding how useful each one is matters, but we should avoid mixing them and treating them as the same.
Generally, an investor reads the raw data first, then the commentary. It could be a profit release, a pitch deck, a company statement, or macroeconomic data.
Knowing what actually happened first helps you understand why third-party commentary may be useful later.
This method helps you see whether a commentary offers a helpful explanation of the situation or simply restates the feelings a news item caused.
Time Can Filter Out Market Noise
Markets change fast, so the reaction to an initial interpretation of a statement might not be the best response to the situation at hand. By waiting a bit longer to see what else is coming, one can tell whether it is a long-term trend or just a passing wave.
Even one weak quarter would lower a stock’s valuation, at least. However, when several weak quarters come together with poor margins and lowered projections, investors can draw stronger conclusions.
Generally, the signal provided by a trend or pattern is much stronger than that produced by a one-off or singular event.
That’s why stock market analysts often compare recent results with those of previous quarters, years, and even management expectations.
Build a Consistent Information Filter
You don’t have to ignore every development to filter market noise from real news. But to be able to do it, one needs to get into the habit of reading any sorts and sources of news in a particular, clear way or, at least, to use such a lens or prism of vision to interpret them.
Therefore, the next time an investor is about to react to a new change, they could first stop and reflect on the following questions:
- Does this news really represent a breakthrough, or just a restatement?
- Does it alter the initial expectation?
- Which area of the business does it impact?
- Is the assertion proven in terms of the facts?
- Is it related to other things?
- What is the exact quote from the source?
Asking these questions takes only a little time but effectively slows intake and helps assess the reliability of a piece of information.
