Bruce Karsh has been regarding a major reason why it’s particularly challenging to profit from a short-term focus: It’s very difficult to know which expectations regarding events are already incorporated in security prices.

One of the critical mistakes people are guilty of — we see it all the time in the media — is believing that changes in security prices are the result of events: that favorable events lead to rising prices and negative events lead to falling prices. I think that’s what most people believe — especially first-level thinkers — but that’s not right. Security prices are determined by events and how investors react to those events, which is largely a function of how the events stack up against investors’ expectations.

How can we explain the company that reports higher earnings, only to see its stock price drop? The answer, of course, is that the reported improvement fell short of expectations and thus disappointed investors. So, at the most elementary level, it’s not whether the event is simply positive or not, but how the event compares with what was expected.

Further, in the short term, security prices are highly susceptible to random and exogenous events that can swamp the impact of fundamental events. Macro events and the ups and downs of companies’ near-term fortunes are unpredictable and not necessarily indicative of — or relevant to — companies’ long-term prospects. So little attention should be paid to them... To know the difference, you have to have an in-depth understanding of the company.