Biz magazine covers as contrarian indicators

Nicholas Vardy writes on the Seeking Alpha web site about the research that shows how being on the cover of a business magazine is a contrarian indicator when it comes to investing. The latest example, he says, is Apple Inc. on the cover of The Economist.

Vardy wrote, “The more important question for us is how the stock prices performed after the cover stories appeared. Here, the research supported the use of magazine cover stories as a contrarian indicator. The most negatively portrayed companies managed to beat the market by an average of 12.4%, whereas the outperformance of the media darlings fell to just 4.2%. The conclusion? Positive stories generally indicate that the stock’s price performance has topped out. Negative stories often come right at the time of a turnaround.

“The study confirms that it is better to bet against journalists than alongside them. It would be easy to jump to the self-congratulatory conclusion that journalists are incompetent. But that conclusion misses the point. Journalists aren’t writing cover stories to make investors money. They are writing cover stories to sell magazines. And ‘hot topics’ sell. But it also means that when a company or financial trend is featured on a magazine cover, the chances are that the trend is already widely known, and universally accepted.

“If investors misappropriate magazine cover stories as an investment strategy — well, that’s their fault. Behavioral psychologists call this ‘recency bias’ — the tendency to be excessively affected by the pattern of recent data. ‘Availability bias’ is a close cousin. Behavioral psychologists can trace back all financial manias — whether the Internet in 1999 or China in 2007 — to our own, intrinsic, inevitable cognitive distortions.”

Read more here.