We live in an information age. Social media allows data to flow, opinions to fly, and narratives to propagate the internet. But how much of it is useful information, instead of just noise?
The news media attempts to provide interesting and useful information in an effort to attract readership and advertisers. But the news media has the daunting task of finding something to write or talk about every single day, with some outlets on the hook for 24/7 commentary. And the news media, by and large, is staffed by generalists who often are learning about the subject matter even as they report on it. Mistakes are made. Noise is published as signal. Our time is wasted with non-sequiturs. Hey, it happens.
We, the people, need to read and listen critically, and always question what we read and hear, demanding verifiable facts and well-reasoned analysis.
A case in point is the recent article in Barron’s Magazine titled “Tech Stocks Dominance Poses Risk For Investors”. Avi Salzman, Senior Editor for Barron’s Magazine, writes that the tech sector now accounts for 25% of the S&P 500 by market cap. Also, that just five tech stocks make up 14.4% of S&P 500 market cap. He then writes that many diversified investors are largely tech investors. Of course, he’s wrong. What he is attempting to state is that an investor in the S&P 500 index has more tech exposure than they probably realize and more tech exposure than they might want. However, anyone who’s invested solely in the S&P 500 isn’t a diversified investor, since the S&P 500 index only represents U.S. large cap stocks. A diversified investor would also have exposure to U.S. mid cap and small cap stocks, international stocks, emerging market stocks, real estate, precious metals, and at least some exposure to bonds (which also come in all shapes and sizes). No one should just own U.S. large cap stocks. And certainly no one who does just own U.S. large cap stocks should believe themselves to be adequately diversified.
Avi goes on to write, “On the way up, the tech rally made even the most passive investors look like geniuses.” Again, he’s wrong. Because of course International stocks outperformed U.S. stocks last year. A genius passive investor would have put all their money into Vanguard’s Total International Stock Index fund rather than an S&P 500 index fund.
Next, Avi devotes several paragraphs to the dangers of passive investing compared to active investing, including quotes from three different sources touting the advantages of active management over passive investing – because active managers can control how much exposure they have to tech stocks, rather than allowing the index to dictate exposure. Good to know, right?
Not really, no. Turns out that active fund managers have more exposure to the tech sector currently than does the S&P 500 index. In fact, active managers in the domestic large-cap space are currently 29.4% allocated to technology. Now it’s true they’ve dropped their exposure from 30.3% last October, but it’s still not exactly playing defense now is it?
But Avi isn’t the only one transmitting noise instead of signal. He quotes a chief investment strategist in his article who states, “Now tech makes up a quarter of the index and contributes 23% of the earnings growth, an indication that its sector weight is in line with its economic value.”
A real signal, right? Of course not – wrong metric. It’s like saying someone is fat because they are tall. Height might have something to do with weight, but it doesn’t tell us anything about whether a person is fat. The tech sector’s growth rate might have something to do with how investors value each dollar of tech earnings, but that doesn’t tell us anything about how the tech sector should be valued relative to the overall market. Noise!
Most of the content out there in the wide, wide world of social media contains noise. Much of the content is all noise. Avi’s article provides almost no actionable information for an investor and certainly the title, “Tech Stocks Dominance Poses Risk For Investors” is little more than click bait.
