By: Steve Smith
In the age of 24 hour news cycle, easy access to research and data and of course Twitter, where everyone has an opinion, it’s easy to get overloaded with information. Today’s investing advice will help you cope with this overwhelming deluge of data.
Here Adam Sarhan explains What Type of Information Will Help your Bottom Line. And more importantly, 10 ways you can avoid applying information that hurt you.
In theory, information should make the stock market’s world go round. Information about companies and their ability to make money in the future is what should determine share price.
As the market learns of new information, price is adjusted up and down to reflect the value of that information. This implies that investors should focus their analysis on information so they can predict where share prices should go in the future.
While this makes good sense, I have found it to be extremely rare that investors who use information are able to consistently beat the stock market. With smaller retail investors (most of us reading this) in particular, the use of information as investing advice is more destructive than beneficial.
1. INFORMATION CAUSES YOU TO IGNORE THE MARKET’S MESSAGE
When you have an understanding of a company’s story, there is a tendency to fall in love with that story and ignore new information that goes against your outlook for the stock. This leads the committed shareholder to hang on to a losing position, allowing the loser to bog down the performance of the overall portfolio.
2. THE MARKET MAY NOT BE TRADING ON FUNDAMENTALS
In theory, stock price is based on the present value of future earnings expectations. In practice, there are often very non-fundamental influences on share price. A large investor that has a liquidity crisis may be forced to unload a large position with little regard for price. Often, the laws of supply and demand affect share price even though theory tells us that they should not have an influence.
3. YOUR INTERPRETATION MAY NOT BE THE SAME AS THE MARKET’S
Our mood affects how we judge information and the same can be said for the market in general. Your fundamental analysis may be correct in an optimistic environment, but if the market is in a pessimistic mood, the investment can lead to losses. Even when the market is wrong, it is right.
4. WE TEND TO FOCUS ON INFORMATION THAT IS EASY TO GET
We often look for the easiest way to achieve a goal. With information, there is a tendency to focus on the information that is front of us. Rather than work to find something to disprove our thesis on a stock, we instead look for information to strengthen our thesis. In doing so, we present our own biased outlook for our investment decisions that can often be VERY incomplete and wrong.
5. INFORMATION IS USUALLY ALREADY PRICED IN
Most investors use publicly available information. That means it is widely known and available to anyone considering the stock. If information is available to a large number of investors then we should expect that the market will have priced that information in to the stock. Therefore, the information has not value to us.