A new study has found a flaw in how people interpret the very headlines they are seeing
Become a more discerning consumer of financial news.
Investors who can recognize 'pure news' about a company have an advantage.
You can beat the stock market by becoming a more discerning consumer of financial news, according to a recently published study. The key is learning how to differentiate between news about a stock that is truly news ("pure news") and news that only appears to be news but isn't really, ("old news").
The study found that old news is akin to no news at all. It's already reflected in stock prices, and investors gain no advantage when basing their stock selections on it. In contrast, the market doesn't immediately discount "pure news," which gives an advantage to those who quickly recognize the pure news for what it signifies.
The study, "The Inefficient Pricing of News," began circulating in April in academic circles. The study was conducted by Antoine Didisheim and Hanqing Tian of the University of Melbourne and Bryan Kelly and Mohammad Pourmohammadi of Yale University.
The research results counter the prevailing view that the stock market is so efficient that it almost immediately reflects anything reported in the financial news. Yet if that were truly the case, there would be no point in even trying to become a more discerning consumer of financial news. The new study suggests that this longstanding belief is wrong.
To illustrate the distinction this new study makes between "old news" and "pure news," consider GameStop $(GME)$ in early January 2021 just as the meme stock craze was about to take off.
"Imagine a news article about GameStop in early 2021," Didisheim wrote in an email. "The paragraphs discussing its struggling brick-and-mortar retail metrics or baseline volatility are entirely predictable based on the firm's fundamentals, so the market has already priced them in.
"But," Didisheim added, "the sudden headlines mentioning the 'WallStreetBets' Reddit forum driving a historic short squeeze: that is the unpredictable 'pure news'." By focusing on this "pure news," an investor may have been able to jump on GameStop's meme stock bandwagon earlier than the average investor.
This is just one spectacular example. To reach their more comprehensive conclusion, the researchers employed a large-language model (LLM) to analyze the 6.7 million news stories from Reuters between January 1996 and December 2022 that mentioned a specific stock. The model was trained to segregate the "pure news" in each article from that which was old and stale and, therefore, predictable. The researchers found that, as of when an article gets published, the market had already completely discounted the "old news" but not the "pure news."
The researchers devised a market-beating strategy for exploiting this discovery, buying those stocks that their LLM suggested would rise as the market fully discounted the pure news, and shorting stocks the model projected would fall. Their hypothetical portfolio performed extremely well - producing risk-adjusted performance superior to virtually all other stock picking strategies that have previously enjoyed academic seals of approval.
Hear the news
None of us will be able to precisely duplicate this hypothetical stock picking strategy, as it would require us to employ the large language model developed by the researchers and apply it to millions of news stories. Nevertheless, the new study can still help us improve our performance.
Start by familiarizing yourself with the fundamentals of the stock that is the focus of the article you're reading. For example, according to the study's authors, "stocks with [low price/book] ratios are more likely to see articles written about cash-flow stability and dividends. Younger stocks are more likely to see news about growth trajectory. Highly levered stocks are more likely to experience news about debt covenants and credit ratings."
Such discussions contain little in the way of "pure news," and therefore can be overlooked as you search for what is truly new - and potentially more profitable. Once you have isolated the pure news about a company, there are several rules for interpreting it. One is that the market is slow to react to pure news that has "high quantitative intensity" - articles that dissect a company's income or balance sheet, for example. So you should consider buying if the picture painted by the "dense data" is positive.
Another of the researchers' rules is to steer clear of companies that are the subject of negative pure news - for example, articles reporting "cybersecurity breaches" or "corporate criminal charges." That's because "the market is slow to fully incorporate" pure news that is bad.
Your goal is to identify stocks which haven't reacted in expected ways to positive- or negative pure news. This will require you to cultivate the courage of your own convictions, since you will need to believe you're right and the market is wrong. Ordinarily that would show dangerous arrogance, but this new study finds that in the case of pure news it actually is helpful.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
-Mark Hulbert
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July 04, 2026 09:10 ET (13:10 GMT)
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