News vs. Noise: Sifting Through News Advertisements

By Joe Ponzio on October 29, 2007  |  4 comments

We all know that the markets are driven by fear and greed. We know that, on a daily basis, we are bombarded with information and news about stocks and the markets. As investors and casual internet surfers, we are flooded with information and advertisements about "The Ten Best Stocks For 2008," "How To Retire Wealthy," and "Oil Sets New High—Stock Market Outlook Is Gloomy (or Rosy)."

In the end, the news sources, the advertisers, the brokerages, etc. have one goal: They want to sell you something. The company with the scariest or most optimistic news will likely attract our attention, and hopefully our dollars, to buy their "protection" or their "solution".

How do we sift through the garbage to find real gems of information—the edge we need to profit greatly?

Learn Advertising And Marketing

First off, you need to look at the ultimate intention of the source of information. There is nothing wrong with a website or company profiting from hosting advertisements. In addition, there is nothing wrong with a company (or website) advertising to attract your attention. For example, F Wall Street has had more than 580,000 visitors since its launch in July of 2007. I've profited handsomely—raking in nearly $42 in about three months. (I've stated before—My goal is not to bog everyone down with ads)

To be able to sift through Wall Street's garbage, you need to know a bit about advertising and marketing. Companies issue press releases all the time. For example, take a look at Microsoft's recent press releases. 72 in October of 2007—and we have a few days to go.

Most company-issued press releases are little more than "branding"—a technique used by companies to keep their name and products in the forefront of your mind. When it comes to analyzing companies, you need to sift through the "branding" noise because, more times than not, it will not immediately affect your company.

Microsoft Noise

In an October 2007 press release, Microsoft "announced a strategic alliance to explore ways to improve digital imaging solutions for professional photographers and enthusiasts." Microsoft enthusiasts might get excited and start dreaming of the potential profits. In fact, they'll often start buzzing that this will bring Microsoft to the forefront of digital imaging—and it will crush Adobe in the process.

But what is really being said in this press release? If you break it down, Microsoft did nothing more than announce that it will explore ways to improve digital imaging. Until those ways turn into dollars, Microsoft will likely lose money exploring—paying people to explore without reaping any rewards during the exploration.

The Cost Of Exploration

Don't run off and short Microsoft just yet! Morningstar reports that Microsoft has generated $54 billion of revenues in the past twelve months. Assuming they put thirty people on a team to "explore" digital imaging—and further assuming the average salary of those thirty people is $80,000 + $10,000 in software and support—Microsoft would spend roughly $2.7 million on this project. Add in costs for space, taxes, 401k contributions, etc., and let's call it a hefty $3.5 million.

If Microsoft gives this team a one-year deadline to come up with something—anything—Microsoft's expenses will increase roughly 0.0065%. No one—not even Wall Street—would notice a 0.0065% increase in Microsoft's expenses and a commensurate 0.0065% decrease in their Net Income.

Today's Conclusion

We'll spend more time on News Vs. Noise this week; however, today's take-home: Don't panic or get excited until you look beyond the "advertisement" and read between the lines. Branding doesn't affect companies so long as the amount spent branding brings about a commensurate level of sales. In this case, Microsoft likely spent little more than $200 or $300 drafting and issuing this press release. Hardly a cause for concern.

The above press release bears little to no affect on the future of the company because, well, hype is hype, and rumors are rumors. Until that "exploration" noticeably affects—or can affect—owner earnings, it is just noise to us.

Thousands Of Press Releases; One Rule

Price follows value. In the short-term, Microsoft (or competitors) can force gamblers to do crazy, uncomfortable things to its stock price. Still, reality will catch up eventually. It usually does:

Side Note: I have a lot of e-mails from visitors that I need to respond to. I am far behind; still, I will get back to you. Give me another couple of days—I'm not ignoring you! Thanks.

Also Filed Under "How to Think About Investing"

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• Noise vs. News: Fed Meetings and Rates
• When To Watch Out For Insider Selling
• Phil Fisher on Profit Margins, Part II