I recently had a chance to ask Steven Sears who writes The Striking Price column at Barron’s and is also the author of new book The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails a handful of questions. He was kind enough to provide some really fleshed out answers to my questions, so I am going to run one each day this week. You can also take a look at part one here. Without any further ado here is part two:

AR: Even though you are member of the financial media you are skeptical about its value for investors. So how should investors consume (or not) financial media?

SS: We have an old saying in the news business that is good advice for investors: If you’re mother tells you she loves you, check it out. Most individual investors never bother to check out much of anything and they should.

My skepticism really revolves around the mechanics of markets, and money flows and media. Too few people realize what often happens when media intersects with the market – and it is through that prism that financial information should be used.

Most people see something in the media and they take it as gospel, which it may well be, the proper conclusion, but timing is everything. The key principle for all investors to remember is that the stock market is a discounting mechanism, which means that most everything is already reflected in security prices before it is ever reported in newspapers, websites, blogs, and stock analyst reports. I think a lot of individual investors forget that fact, or get carried away and gloss over it.

To use financial news, rather than be used by it, requires reading as much original information as possible, including earnings reports and economic reports, and comparing source data to what is reported. In the market, many investors try to avoid derivatives of derivatives because they think something is lost in the repackaging. Yet, when it comes to information, most people never have that same misgiving.

Last week, for example, two major newspapers had differing views of the same subject. After JP Morgan and Wells Fargo reported earnings, the Wall Street Journal headlined a story “Bank Earnings Dismay Investors,” and the New York Times said “Solid Results at 2 Banks Bode Well for Industry.” So which one is right? The logical response, at least how I hope investors respond, is that they take note of the discrepancies, keep calm and carry on because they have read the conference call transcripts and earnings reports. Too often, though, we know they do neither. This means that each headline or news story in a 24/7 news cycle potentially rattles many individual investors because they no real contextual, analytical understanding of their investments.

People see things on the cover of a magazine, for example, and they rush to buy the stock. But the trade is over by then. Sure, the stock may advance a bit more from all the new media induced buying but ultimately the money runs out and the stock declines. As I have heard said, the news follows the trend, and the trend makes the news.

To invest well, you have to read widely, including research reports, news articles, and square it with the numbers. The parts can be greater than the sum. If you focus on only one piece of the puzzle, you’ll almost always be puzzled. Yes, you’ll get it right it from time to time, but no one can successfully navigate the market that way – at least not for very long.

Tomorrow part three of our discussion.

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