The Limitations of Headlines

Apr 2018 //
Behavioral Finance

Suppose you saw a headline that read, “Retail sales plummet!” Should you sell your retailer stocks? Without further information, the headline— even if true—could be misleading. For example, retail sales plummet every January after strong Christmas season sales. Home sales, energy consumption and many other economic statistics are very seasonal, so simple month-to-month comparisons are fraught with risk for investors who are prone to act on the latest headlines. Consider this one: “Amazon revenues climb 20% from prior year.” Is that good or not? The answer depends on other important factors, such as whether Amazon’s earnings rose commensurately and whether investor expectations were previously set for 25% or higher gains. Flashy headlines sometimes capture the reader’s attention, but relying on them for investment decisions can be dangerous.