Making Sense of all the Adjectives

You should not react or fall prey to urgent words that you read or hear. Put them in context and recognize that a more balanced, longer-term perspective is what is necessary to rationally make conclusions about investment conditions and economic fortunes. Do not ignore short term pronouncements but see them as part of a string of past and future announcements so that you have rational context. 

Fear and anxieties impact one’s understanding of the meaning of the word spoken and can elicit different emotional responses. Unfortunately, many dramatic words are used when describing markets and economies and that tend to lead to strong emotional reactions from investors. Strong emotional reactions tends to impact our decision making.

In reality, current headlines are bits of information that become more meaningful when they are part of a larger collection of facts. GDP losses due to Coronavirus will certainly be significant but will not be impacted forever. Retail sales will bounce back so current sales shrinkage numbers will be perpetually dramatic.

Do not let short term news or headlines (or vocabulary) dictate your intermediate and long-term perspective.

Here are a few favorite words I often read that lead investors and economy watchers to make rash long-term conclusions based on short term conditions.

Skyrocket    Collapse    Euphoria    Plummet

Let's use the word skyrocket in an example. Suppose a stock trades at $50 per share on January 1. By April 1, the stock’s value has dropped by $40 because of bad news. The stock is now trading at $10 per share. On April 4, the stock goes up $5 to $15 per share. Here's the headline that you must decipher: "ABC Skyrockets 50% on Hope the Company is Back on Track”.

Yes, the company stock did go up 50%. Yes, I suppose that could be deemed as a skyrocket phenomenon. However, if you bought the stock at $50 a share, you probably are not thinking the stock has now skyrocketed. Based on your time horizon as a $50 investor, you probably think the appropriate word is collapse, not skyrocket.

You see how it all depends on context and, in particular, a one-time perspective? This is why many are confused when they read or hear a news report because they simply do not understand the time context of the information provided.