< Go Back

Profiting from the News

Profiting from the News

    It’s never a good idea to get investment ideas from cartoonists. Nothing you hear from me should be construed as advice. And more generally, it’s a bad idea for small investors to buy individual stocks or to attempt timing the market.

    You have been warned.

    I started testing an investment strategy a few years ago that is producing positive results. Yes, I am aware that my small sample is meaningless. And the numbers I present aren’t annualized or compared to their same-industry cousins that did even better. But I want you to hear the strategy just so you can keep an eye on it going forward.

    The investment idea is that the news always exaggerates risks. This is an extension of the Adams Law of Slow Moving Disasters that says humans generally figure out how to avoid big disasters when they see them coming.

    So, for example, when BP stock was in the toilet, and the news media kept telling us the Gulf would be ruined for decades, I loaded up on BP stock because I predicted the opposite: a better-than-expected clean-up. That prediction turned out right. So far, that investment has paid about a 5% dividend in recent years and the stock itself is up 19%. (You should interpret that as just “up” because I haven’t compared the performance to the market in general that is also up.)

    When the news was reporting that Iranian leaders were on a suicide mission to develop a nuclear bomb to destroy Israel and their own country, I assumed it would all work out peacefully and I invested heavily in a beaten-down EFT of Israeli stocks. It’s the biggest single investment I’ve ever made. That’s up 26%.

    When the news indicated that the government of Turkey was circling the drain and disaster was near, Turkish stocks crashed. I predicted that Turkey would work things out and get back to business in due time. So I loaded up on the biggest cell phone company in Turkey. As bad luck would have it, that company also has a big position in Ukraine, so it took a hit after I bought it, but now it’s up 10%.

    To reiterate, I’m not annualizing the gains or comparing them to anything relevant that would tell you how those investments did compared to other investments over the same period. The market in general is up over this same period so it makes almost any strategy look like a winner.

    And one must compare investments that have similar risks. Some of you will say I got a meager return betting on high risk stocks. An economist would call that losing. But no one can accurately assign risks for the stocks I mentioned. My investments looked high-risk to the world and low-risk to me. So when I look at the returns for the three investments I mentioned, I compare them to low-risk alternatives and they look fairly good. I would expect most of you to compare them to high-risk alternatives and conclude that they underperformed that class. That difference in risk-assessment is what makes my investment strategy a strategy.

    I don’t recommend that you invest your own money this way. History is littered with crackpot investment ideas of this type. And my best investment gains over that period were in a diversified ETF. But keep an eye on the strategy just for fun.

    I wonder if anyone has ever lost money betting against the news industry’s predictions of doom.


    Scott Adams

    Co-founder of CalendarTree.com

    Author of the best graduation gift ever.


More Episodes