How media get things wrong

Be wary of news briefs from the financial media – they are designed to catch reader’s attention but in reality often mean nothing – or worse could even be misleading. I follow mainstream news but with care. On one hand we investors need to stay abreast with news related to the businesses we own. Conversely, we are better off not being swayed by popular sentiment. Remember the stock market prices in all widely available information (and attitudes) about a business.

Follow news, ignore opinions. This is the best course of action for long-term oriented investors. Keep up with the media but distinguish news from opinions. Don’t take a news story for fact – do your own due diligence. Ken Fisher sums it up this way:

Here is an example of how media mislead investors. On June 16 last year, Amazon (AMZN) announced that it will acquire Whole Foods Market (WFM) for $42 a share – worth about $13.7 billion. Amazon stock popped on the news – jumping up by about $32 that day. The same day CNBC posted this news brief on their web site:

The article went on to say that due to the pop in Amazon stock that day, its market cap went up by $15.6B. It is only paying $13.7B for WFM – hence they are getting Whole Foods essentially for free.

However if you were a savvy investor who don’t take words at face value, you’d have reached for the official press release from Amazon. There you would have quickly found (first paragraph, in fact) that Amazon was offering an all-cash deal and there was no mention of any stock offering. So the fact that the Amazon stock jumped up on the news had no relevance to how the deal was to be funded.

Before the acquisition closed, Amazon ended up issuing $16B in corporate debt to pay for WFM acquisition – along with other general expenses. They clearly did not get WFM for free!

Media tend to make a big deal out of single-day pops and busts in the stock market. It’s what catches casual readers’ attention. For long-term investors though, these daily moves mean little. In fact, stocks’ daily churn neither helps the business itself nor the majority of its shareholders. Public companies can’t generate cash from their rising stock prices unless they sell additional shares. Selling – also called secondary stock offering – involves a lengthy process requiring registration with the SEC. It’s not something public companies do often or pull off on a short notice.

Let’s revisit the stock pop that Amazon experienced that day. On a regular day, less than 1% of Amazon shares are traded in the market. On June 16^th – the date of the announcement – Amazon experienced very high volume (11.47M shares versus average 3.9M) – still those 11.47M shares were just 2.4% of total shares outstanding. In other words, more than 97% of shares did not change hands even on that unusual high-volume day. Shareholders kept their shares – preferring continued ownership over making quick bucks. Amazon closed that day at $987.71 – near its all-time high. Today (Feb 14, 2018) it is at $1441.

Just because on that day in 2017 some 3% of owners liked the price buyers were offering, it didn’t mean that other shareholders ought to have noticed. Such is the nature of the stock market – every day it will offer you a price for your shares. What you do with that information is up to you. The market can’t force your hand.

We, long-term investors, don’t care how a company’s stock price fluctuates on daily, weekly, or even monthly basis. As long as the underlying business is doing well, why bother? If anything, checking stock prices every day can be harmful to your portfolio’s health. We don’t want to sell our stake just because a small minority of shareholders is doing it every day.

As you can see from my portfolio, I own both Amazon and Costco shares. They are in my top 10 stock holdings. Both are durable long-term businesses. When Amazon announced WFM takeover in June, nearly all grocery retailer stocks dropped on the news. By the end of the month, Costco was down about 11%. The valuations were reasonable – though not cheap – and I decided to pick up another helping at around $160. I like to increase stake in core stock positions whenever they go out of favor with the market.