You’ve likely read that a distrust of modern-day vaccinations has led to an outbreak of measles cases in developed countries. The number of parents choosing not to vaccinate their children has grown so large that the Government of Canada has been airing pro-vaccine advertisements during Raptors playoff games. So you’ve probably been informed, at least to some degree, about current vaccination rates.

Great! So here’s a quiz on the topic:

How many of the world’s one-year-old children today have been vaccinated against some disease?
(A) 20%
(B) 50%
(C) 80%

Note that this question applies to the whole world – developed and developing – not just the countries like Canada and the U.S. So what do you think the answer is? A, B, or C?

Well, if you’re anything like people in Sweden who answered this same question, you’re wrong. And if you’re anything like people in France who answered this question, you’re really wrong. The correct answer is 80%. That’s encouraging! No, that’s really encouraging! Even in Afghanistan, more than 60% of one-year-olds have received multiple vaccinations.


Source: Rosling, H. (2018) Factfulness. New York: Flatiron

What’s less encouraging is that only a minority of people who answered this question were as optimistic about the state of the world as what the facts dictate. In fact, a monkey randomly choosing the answer to this question would be more optimistic. So something is clearly afoot.

We’re assuming that people are overly pessimistic about vaccination rates because of what they hear in the media. Which is reasonable! Anyone who hears pessimistic information day after day is likely to form pessimistic views. Unfortunately, that doesn’t mean they are accurate views.

Investing and the Media

We know it’s not a revelation that the media presents information about the world in an inflammatory manner. But what few people stop to think about is how that inflammatory information is subconsciously altering their own views of the world. Usually, this isn’t a big deal. Sure, it may lead to heated debates at the dinner table, but that will usually be the extent of the fallout.

However, when it comes to investing, how the media affects opinions is a very, very big deal. If an investor wants to be successful, he or she needs to see the world as it actually is. After all, he or she is making predictions about what the future will look like, and to do so it is imperative that he or she knows what the starting point – the present – looks like.

Buy low and sell high. That’s what an investor needs to do to be successful. However, history has shown that this is much easier said than done. The following chart shows the year-over-year change of a major global index (in red) and the net flow of investor money into or out of equity mutual funds (in blue). The chart goes back to 2002. Observe when the largest outflows occurred: right in the middle of the financial crisis.

In other words, people were selling low. But it’s hard to blame anyone for doing so, especially when newspapers were printing scary headlines (plus the universal symbol of falling markets: traders holding their heads in their hands).


Source: Financial Times

Question Assumptions

Look, the media does an exceptional job of keeping us informed about the world. Never in the history of mankind has anyone had access to so many diverse sources of information. But it’s important to realize that the media’s first priority is to sell subscriptions or advertisements. And the most effective way to do that is by telling interesting stories, not simply by reporting facts (that are probably much more boring).

We find it useful to remind ourselves that stories are likely in the media because they are so rare. If you regularly watch the evening news, try keeping track of how often the top story is bad news versus good news. We’re willing to bet there will be strong bias towards negative news, despite the fact that the world is objectively becoming a better place as time progresses.

We find employing this same mindset – recognizing when rare events are being presented as common occurrences – helps our investment process. Investors, just like everyone, have a tendency to extrapolate recent performance indefinitely into the future. That’s why you see people buying assets solely because they have recently had strong performance (*cough* Bitcoin *cough*) and selling assets solely because they have recently had weak performance.

On the latter point, profit warnings (when a company announces that profits will be lower than previously expected) frequently give some investors nightmares. Indeed, stocks tend to perform poorly in the wake of a profit warning. The next chart summarizes the performance of 455 profit warnings in the U.K. from 1997 to 1999. These companies’ shares realized a 17% drop in the immediate aftermath of the warning, and continued the price decline over the following months.


Source: Montier, J. (2009) Value Investing. Chippenham: Wiley

But wait! If a patient investor was instead to take the view that a profit warning was probably just a rare event, he or she could be rewarded handsomely. The following chart shows that these same 455 profit warnings were followed by positive share price performance around the 12-month mark!


Source: Montier, J. (2009) Value Investing. Chippenham: Wiley

Summary

This article has basically been a long-winded way to illustrate why we think investors should consume relevant information with a contrarian mindset. After all, if an investor wants to make more money than everyone else, he or she is going to have to do something different than everyone else. For us, that something else is doing our own research and relying on our own opinions. It’s time consuming, and it can sometimes feel lonely going against the crowd, but over the long-term we believe there is money to be made by strategically resisting popular opinion.