Why Smart People Lose a Fortune

Last week, I talked about the current super cycle in global growth.

This has been triggered by the expanding middle class, along with rapid urbanization and industrialization, in emerging economies.

And it will result in dramatic improvements in the wealth of these emerging nations and of the billions of people who live in them, as they play catch-up to Western living standards.

A major opportunity to profit in other words.

But what about the possibility of a “double dip” recession in the U.S….a debt default in Greece…or a crash landing for the Chinese property market?

Surely, these events could throw a spanner in the works of global growth.

Over the short term, these are definitely risks. And not ones investors should take lightly.

But they shouldn’t let you cloud the big picture outlook too much either.

Global Economy Back to Its Pre-Recession Peak

Consider that in 2000 the world economy was $32 trillion in size. Now, after the worst recession and financial crisis in a generation, the world economy is almost twice the size of a decade ago.

Did the subprime crisis and the recession that followed hurt global growth? You bet. There was a significant contraction in growth as a result. But now the world is back to its pre-recession peak.

And next year, based on conservative growth assumptions, the world economy could rise to $64.7 trillion.

Even more important, keeping prices and currencies the same as they are now – the size of the global economy could double again by 2030.

So why do so many smart people miss the woods for the trees? Why do they only focus on doom and gloom when the big picture is so positive?

It’s not because investors are stupid. Most people who invest in the stock market have had successful careers. They are lawyers, doctors, teachers, entrepreneurs and corporate executives. Not dummies, in other words.

The answer has nothing to do with IQ. It has to do with something a lot more basic than that.

It’s something I call the “news factor.” And it puts investors seriously off their game.

Why Ignoring the News Could Make You a Fortune

The “news factor” explains why most people do dumb things when it comes to investing in the markets, whether at home or overseas.

What is the “news factor”?

Simply that most investors base their investment decisions on what they hear from the talking heads on TV or read in the latest newspaper headline, not off of their own analysis of long-term trends.

What’s wrong with basing investment decisions on the news?

Because it involves a fundamental misunderstanding of the way the markets function.

Put very simply, the markets don’t react to news. The news is about what has already happened. But market prices are about what will happen in the future.

The market is often described as a “discount mechanism.” That’s because it discounts events that could be months…maybe even years…in the future.

So when you open the Wall Street Journal or USA Today, or when you tune into CNBC, and read about the latest unemployment numbers or deficit reduction spat in Washington…chances are the market has already incorporated this news into share prices.

And by the time the CNBC staff have received, digested and incorporated the news into their latest slot, the market will have already moved on to what will happen next.

This is why contrarian money manager Barry Ritholz says he reads the Wall Street Journal on the train home, and not on the way to work.


Because as he says, it forces him to recognize that “the news is stale.” And it helps him avoid allowing the news to influence his decision-making process.

Markets tend to move in long-term trends. This is why even after major unexpected events such as the bombing of Pearl Harbor and the assassination of J.F.K. the immediate market reaction is often a big move. But that move notwithstanding, the markets tend to continue the direction of the prior trend.

This is why I remain long-term bullish…especially on the emerging world…despite the short-term headwinds.

News is mainly noise and entertainment. Investors…even smart ones…who base their investment decisions off of it stand to lose a fortune.

Investors who focus on the long-term trends will be handsomely rewarded.