6. INFORMATION USUALLY COMES WITH A BIAS

As a general rule, people do what they are financially motivated to do.  If someone is encouraging you to purchase a stock, there is a good chance that they have some financial motivation to do so. Before you trust the information you receive, understand the financial motivation. If you find the reason, you will often find that there is a strong bias in the information being provided to you.

7. TRADING ON TRULY INSIDER INFORMATION IS ILLEGAL 

There are few risk-free trades in the stock market, but trading on significant, inside information is one. You stand to make a lot of money buying stock in a company that will be acquired by another at a premium tomorrow. If you have that information and act on it, you are trading on inside information and that can land you in jail.

8. GATHERING GOOD PRIVATE INFORMATION IS EXPENSIVE AND TIME-CONSUMING

There are investors who are able to uncover information that is not priced into a stock but is not considered inside information. This private information is valuable because it can lead to market beating returns. However, gathering private information typically requires significant resources, knowledge and time. For small investors, it is not feasible to do this kind of work across a broad range of stocks.

9. YOU MAY NOT HAVE ALL OF THE INFORMATION YOU NEED

The market tends to focus on two or three key information points that affect the price investors are willing to pay for it. An investor who does a thorough fundamental analysis of the stock may still have an incomplete understanding of the company’s business. If missing one of the key points, this investor can make a gross error in valuing the stock.

10. THERE IS NO STANDARD FOR WHAT INFORMATION IS WORTH

There are many formulas for determining what a company’s share price should be.  Many fundamental analysts look for stocks to trade at a certain multiple of their earnings with that multiple to be based on growth.  However, there are great variations in accounting methods that can have a profound effect on how earnings are reported. More importantly, there is no rule that a company should trade at a certain multiple of earnings, that target multiple is just an opinion.

THE BOTTOM LINE:

Ultimately, I look at the market’s interpretation of all available information when I look at a chart of price and volume. It shows not only every bit of information detail but also what the market thinks of it.

 Related: Why Bank of America is Worried About the Market