Of Bugs and Features

The original computer bug was a moth short-circuiting a Mark II relay switch. Since then, it refers to any glitch that can disrupt a system.

Financial markets are notoriously “buggy.” Sometimes their pricing becomes absurd. In 1982 stocks traded at an 8 price/earnings ratio. In 2000 this had expanded to 32. In 2007, AAA-rated sub-prime MBS only yielded 1.5% more than Treasuries; in 2003 junk bonds traded 10% above risk-free bonds. Unexpected news can create manias and panics. Careful, self-aware investors can take advantage of these massive miscalculations and profit by being greedy when others are fearful—and fearful when others are greedy.

News organizations have a different set of motives, however. For them, the model is to create content, attract an audience, and sell ads based on that audience. The sensational is what sells—“If it bleeds, it leads.” For markets, irrational behavior is a bug, based on human self-protectiveness and self-delusion. For media, irrational hype is a feature, emphasizing the outrageous and creating buzz.

I’ve thought about this dichotomy when it comes to gridlock in Washington, the budget-sequester, and the recent, breathless news stories. For all the hype, the markets have responded with a collective yawn. For the month of February, 10-year bond yields are down 0.1%; stocks are up about 1%; Oh. My. Goodness.

If you wonder which approach is right, all you have to do is ask who you trust: the process designed to match buyers and sellers; or the one trying to create an audience and sell it?

Douglas R. Tengdin, CFA

Chief Investment Officer

17 1/2 Lebanon Street

Hanover, NH 03755

direct: 603-252-6509

reception: 603-224-1350

fax: 866-351-8163




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