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Social Mood and the Media

I would like to pause here to discuss how social mood and the media interact. From my perspective, media (online, print, television, radio, Facebook, Twitter, and so on) are all just more social interconnection points that serve as mirrors reflecting both the herd’s mood on you and your mood back on the herd.

Too many investors read the papers or watch television just for the news, instead of for the real-time indicator of social mood that they are. Remember, headlines are meant to sell papers and to draw you into online articles, so they are specifically written to resonate with your mood as a reader. As a result, all headlines and news stories act as mirrors on how you really feel, often without you even realizing it.

Let me give you an example of what I mean. On July 27, 2011, the following were some of the major headlines in the print edition of The Wall Street Journal:

  • “Boehner Plan Faces Rebellion”
  • “Banks Spar Over Loan Settlement”
  • “BP Results Frustrate Investors”
  • “Funds Could Fizzle”
  • “Home Sales, Prices Reflect Malaise”
  • “Beijing Blames ‘Foreign Technology’”
  • “Wary Firms Opt For Temp Staff”
  • “Under Pressure, McDonald’s Adds Apples to Kids Meals”
  • “Watchdog Sees Financial Weak Spots”
  • “At Soros, Family Is Foremost”
  • “Money Funds Dial Down Risk”
  • “UBS Is Forced to Scale Back”
  • “Deutsche Bank Draws Criticism on CEO Move”

So what were the underlying “reflecting” mood messages for each headline? How about these:

“Boehner Plan Faces Rebellion” “Rebellion” = social unrest
“Banks Spar Over Loan Settlement” “Spar” = adversarial relationships
“BP Results Frustrate Investors” “Frustrate” = hindrance
“Funds Could Fizzle” “Fizzle” = fear of what could happen in the future
“Home Sales, Prices Reflect Malaise” “Malaise” = discontent
“Beijing Blames ‘Foreign Technology’” “Blames” = fault
“Wary Firms Opt For Temp Staff” “Wary” = uneasiness
“Under Pressure, McDonald’s Adds Apples to Kids Meals” “Under Pressure” = unwillingness
“Watchdog Sees Financial Weak Spots” “Weak” = unable
“At Soros, Family Is Foremost” “Family Is Foremost” = selfinterest
“Money Funds Dial Down Risk” “Dial Down Risk” = fear
“UBS Is Forced to Scale Back” “Scale Back” = retrenchment
“Deutsche Bank Draws Criticism on CEO Move” “Criticism” = disapproval

From my perspective, these headlines did a great job of capturing our mood at the time; however, I saw none of this yet captured in market prices. During the next week, however, stocks fell precipitously. Even more, I’d note that people rioted in London and set fire to cars in Germany and Ireland, and, not surprisingly, reported consumer confidence plummeted in August.

When I saw the headlines, I felt like our mood had deteriorated significantly, but the market’s actions did not yet reflect that.

Note that the reverse can also be true, however. Headlines and the media can often be late in capturing our mood. For example, I love all of those “market plummeting” news specials on CNBC and Bloomberg. They are great indicators of a pending change in market direction. Why? Because they pull together both emotion (with all the scary music that naturally accompanies those programs) and our collective sense of uncertainty. And if it is on national television, we must all be feeling it, too.

The same is true for many magazine covers. They are often much better contrarian indicators than anything. For example, The Economist featured a particularly grim cover on its October 1, 2011 issue with the headline, “Until politicians actually do something about the world economy... BE AFRAID,” with “BE AFRAID” in big bold red lettering in the center no less. That cover coincided perfectly with a major market bottom, following which the S&P bounced more than 20% in less than a month!

More often than not, investors fall victim to the mood and emotion reflected in the media and do precisely the wrong thing in response. Rather than readily accepting headlines and cover stories as fact, investors would be much wiser to ask themselves whether the “certainty” reflected on magazine covers and news stories all around them is already reflected in market prices. When it is, a significant market turn may be at hand.

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