Stop Turning Market News Into Costly Mistakes

They knew the news before the rest of Wall Street. 

Yet, nearly half still lost money, and some lost everything.

Even tomorrow’s headlines could not save them from today’s bad decisions.

In November 2023, investment firm Elm Wealth gave 118 young adults trained in finance an extraordinary advantage.

Participants received a $50 stake and access to future Wall Street Journal front pages. Market prices were blacked out, but the news remained visible.

They could trade stocks and Treasury bonds before that news became available. The game covered 15 selected trading days, one from each year between 2008 and 2022.

The results were a powerful reminder that information alone cannot make you rich.

Even with this edge, 45% lost money, while 16% lost their entire stake. Participants correctly predicted market direction on just 51% of their trades.

Researchers identified two problems behind those results: weak predictions and poorly sized trades. 

Participants struggled to anticipate market reactions, then made their mistakes more expensive by taking excessive risks. 

Many investors spend their days searching for an information advantage. They follow election polls, inflation reports, interest rate forecasts, and every comment from Washington.

They believe that knowing what happens next will tell them what to buy. But an event and the market’s reaction are two different things.

A company grows profits by 20%, and its stock falls. Investors expected 30%, so a strong result becomes a disappointment.

Knowing the result would not have told you which way the stock would move.

That leaves anyone trading the headlines with two difficult jobs. 

First, they must correctly predict what is going to happen. Then they must predict how other investors will respond.

That is a lot to get right before breakfast.

An apparent advantage can change how much money someone is willing to risk. Feeling certain can tempt an investor to make a much larger commitment.

Borrowing magnifies that danger because losses grow alongside potential gains. A relatively small market move can cause enormous damage to an oversized position.

There is an important wrinkle in Elm’s findings worth understanding. 

Five experienced traders were invited to play, and all finished with gains. The researchers emphasized their more disciplined approach to choosing trade sizes. 

The information had value, but using it required judgment. Deciding how much to risk mattered alongside deciding what might happen.

After more than 40 years of investing, I know I won’t get every decision right. That is why I never want one bad investment to put my financial future at risk.

Being wrong should cost you money without costing you your financial future. 

Before deciding how much you could make, consider how much you could afford to lose. 

Even the best information can’t make an investment a sure thing.

The encouraging lesson is that ordinary investors do not need a crystal ball. We can build our approach around something more practical than predicting tomorrow’s market reaction.

We can study businesses and decide whether their futures justify their prices. We can examine how they earn money and why customers keep coming back.

We can judge whether management invests carefully and treats shareholders fairly. We can assess whether the company has enough financial strength to survive difficult conditions.

Those questions give our research somewhere useful to go each day. 

A forecast can become obsolete with the next economic report. Understanding a business can help us assess developments for years.

At the American Prosperity Report, our Alpha-4 Approach gives that work a consistent framework. We seek an industry trend supporting growth, outstanding leadership, sound finances, and a bargain price.

America’s businesses can keep creating value without you predicting the next headline. Our job is to find the ones worth owning at prices worth paying.

You can play Elm Wealth’s Crystal Ball Challenge yourself and see how you fare with tomorrow’s news.

Let me know how you do at [email protected].

Spend less time guessing what the market will do tomorrow. Spend more time understanding what your businesses can earn for years.

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If you have questions, you can send them to me at [email protected].

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Regards,

Charles Mizrahi
Prosperity Insider