Making Sense of all the Adjectives
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Making Sense of all the Adjectives
Words and Meanings
As many of you know, my PhD is in education and I was an adjunct professor for many years teaching a variety of subjects. Often, discussions centered around the meaning of words and the perceptions of those words by listeners. Fears and anxieties impact one’s understanding of the meaning of the word spoken and can elicit different emotional responses. Unfortunately, many dramatic words are used when describing markets and economies and that tends to lead to strong emotional reactions from investors. Strong emotional reactions tend to impact decision making.
The true meaning of a word is oftentimes determined by the time frame context. Here's an example. Suppose one night you are preoccupied and dinner is burned. It's an unfortunate occurrence and at that moment upsetting. A wasted meal, wasted money, pungent aroma, and some degree of remorse. At that moment, it's not a pleasant experience. The headline no doubt would read, “Dinner Tragically Burned Leading to Immediate and Urgent Hunger”. This is a correct headline for the moment.
Now, after several weeks, someone asks you about your burnt dinner experience. You respond that it was unfortunate and you learned your lesson but life goes on. You were able to locate a replacement dinner and the financial repercussions were minimal. Now, based on this longer time horizon, the headline reads, “Dinner Burned Several Weeks Ago; Lesson Learned”.
Notice the difference in emotional urgency. This is exactly what happens when one reads investment and economic stories. The perceived urgency of the headline provided is determined by a time-frame perspective.
It certainly would be less interesting if all the news reported each day was what long-term trends were. Instead, we all clamor for the news of the day or hour or minute in this social media generation. Everything is now, everything is urgent.
Now is a Component of Longer Time Periods
In reality, current headlines are bits of information that become more meaningful when they are part of a larger collection of facts. Today's unemployment rate while dismal, is not what the unemployment rate was a year ago nor is what it will be six months or a year from now. GDP losses due to Coronavirus will certainly be significant but will not be impacted forever. Retail sales will bounce back so current sales shrinkage numbers will be perpetually dramatic.
Here's my point: you should not react or fall prey to urgent words that you read or hear. Put them in context and recognize that a more balanced, longer-term perspective is what is necessary to rationally make conclusions about investment conditions and economic fortunes. Do not ignore short term pronouncements but see them as part of a string of past and future announcements so that you have rational context.
Here are a few favorite words I often read that lead investors and economy watchers to make rash long-term conclusions based on short term conditions. I'm sure you will be able to come up with some of your own.
Skyrocket Collapse Euphoria Plummet
Let's use the word skyrocket in an example. Suppose a stock trades at $50 per share on January 1. By April 1, the stock’s value has dropped by $40 because of bad news. The stock is now trading at $10 per share. On April 4, the stock goes up $5 to $15 per share. Here's the headline that you must decipher: ABC Skyrockets 50% on Hope the Company is Back on Track”.
Yes, the company stock did go up 50%. Yes, I suppose that could be deemed as a skyrocket phenomenon. However, if you bought the stock at $50 a share, you probably are not thinking the stock has now skyrocketed. Based on your time horizon as a $50 investor, you probably think the appropriate word is collapse, not skyrocket.
Context Context Context
You see how it all depends on context and, in particular, a one-time perspective? This is why many are confused when they read or hear a news report because they simply do not understand the time context of the information provided.
We do not ignore short-term bad news; you shouldn’t either. However, do not let short term news or headlines (or vocabulary) dictate your intermediate and long-term perspective. That's a mistake far too many investors make. This is why we focus so much on trying to keep a calm and rational perspective despite incredible circumstances. That’s our role as your advisor. And that’s why we are so focused on making sure time horizon is a part of the investment discussion as we develop portfolios for your long-term investment goals.