Not enough information is one of the biggest problems for investors. The next biggest problem is too much misinformation.
If we knew everything about a company (its operations, its products, its customers, our world, and how all these will change in the near future), we would be able to better predict what investors will do with its stock. Alas, most of these data points are at least partially obscured, and that is why the market reacts to any new information. But misinformation also clouds the picture.
Mistrust and verify
Once you start diligently following the news about companies and their stocks, you will start differentiating between the straight shooter CEOs and those who posture. You will learn how companies can backstab rivals, and steal each other’s limelight to vie for investor attention. Like jealous sisters, companies can make bragging announcements right when their counterpart is about to post great earnings, announce a breakthrough, or gain FDA approval.
There is so much distortion of reality that sometimes I wonder if it’s best to block it all out, go live on a deserted island, and just order transactions with a satellite phone.
Then there are the made-for-TV analysts and all kinds of supposed experts whose opinions appear designed to move specific stocks and markets on behalf of special interests. How can anybody believe someone who screams, “Dump all your stocks, now!” or “Everybody must own this stock,” (usually when the stock in question is not at all a bargain). Needless to say, don’t assume neutrality, impartiality, or even professionalism. Take whatever anybody says about a stock or the entire market with an entire saltshaker. No one can predict what happens next.
A mainstream newspaper article can in some cases be written by a reporter or Op-Ed writer who is doing a favor for someone in the industry, simply by shedding light on a company, sector, or situation. Even media coverage of a crisis can artificially prop up a company’s stock price, by making readers or viewers believe—often mistakenly—that said stock is currently a good deal and therefore a buying opportunity. Most often, when stocks happen to be in the limelight, they are overpriced for their value. So keep note of it for a later day, when it has receded into the collective rearview mirror.
If you read an article that tells you company A is in trouble, and its stock price is depressed, don’t just go buying it without doing extra meticulous research. It may well just be someone trying to sell you bruised apples. After reading about so and so’s a corporate crisis, I just shrug—and am glad to have no part in it. If you buy that stock during the heat of the crisis, it is now your crisis to own and lose sleep over.
If you wish to purchase a stock when the company is in distress, do so with extreme caution and research—and preferably wait after the dumping has stopped, because you should expect that professional and individual investors and even the company’s own employees will want out. Even better, wait until it’s crystal clear that the company has a plan for how to weather the crisis, which can take months or years. Better yet, look up its competitors and see if you can buy shares in one of those healthier companies that may well profit from their rival’s weakness. Brokerage firms make it easy to find and compare the competition.
The government also may have ulterior motives, sometimes to reign in specific sectors or financial instruments. You kind of wonder sometimes why Uncle Sam for instance throws a regulatory curveball just when some industry is getting too out of control or overheated.
Learn to use information wisely
Nevertheless, be a newshound, and use any reliable information at your disposal, the public and the expert; the free and the paid; the conscious and the non-conscious. The best investors keep tabs on pretty much everything. They read voraciously and try to have the world’s “pulse,” without being too swayed by its short-term readings. For breaking news, don’t rely on a single source. Different sources prioritize different stories, and some seem to take extra time to publish them. Remember, information—and its timely receipt—is money for those who have it first. They will not give out that advantage for free.
Savvy investors remember that the world is interconnected; that products come from raw materials dependent on many factors, including weather; that products have to be shipped to recipients; that buyers of products and services only have purchasing power when they have good jobs, and cash, etc. They also know that sentiment is important, not just about a company but about a sector, and about consumption in general. They know which products are considered luxury and which are essential. They translate economics into real sociological and psychological forces on the markets.
When you hear or stumble across new information, ask yourself:
- could it be wrong or distorted or self-motivated;
- could it be reliable, and if so;
- how can I take advantage of this before the market wakes up to it?
Often there is a lag time between new information and mass investor behavior, so there is often still the opportunity to bite from the apple before people see it. But don’t dawdle, or it will be too late. Investors are experts at exploiting new information. Short-term investors may also dump stock as soon as it is enjoying positive coverage and high prices, so keep that in mind too.
Equally important, when a stock you own starts slipping, make sure you find out why. There may be a good reason for it going down, and if you are no longer sure about its long-term prospects, you may still be able to get out on time, before the market reacts. On the other hand, if you are still very confident about its long-term potential, then transitory bad news can be a buying opportunity at low prices. Whatever your ultimate conclusion, it is best when it is based on many factors, not just the most recent shiny piece of information in the newsfeeds.
Expert research is good but has limits
If you don’t enjoy it, have professional analysts do the financial and fundamentals research for you. Analysts are trained to look at a company’s financial statements inside out and understand its debt structure, source of profits, competitors, etc. So you can use your brokerage firm to do all this work for you. The reputable brokers do a great job of educating their investors and providing them with detailed information on companies, analyst opinions, comparables, etc. They don’t always give you the information in a timely fashion, however. Also, keep in mind that the analysts cannot tell the future no matter the depth of their expertise. And interpretations of the same data can be highly subjective because of different assumptions and methods. That is why analysts often disagree.
Add your own grassroots research when you can
When you see a consumer using a product, ask them if they like it, and if so, what they like about it, and how it compares to the old version they had used. I have asked a waiter about his recent trip to an amusement park and asked a techie about how she liked the new chip inside her computer and a grocery store clerk why an item is not on the shelf—and learned what turned out to be reliable information before the market did. But remember, your personal sampling is usually one person or few. There are many product reviewers online, but not all are independent and some are paid. You may just learn something the market doesn’t know yet.
Naturally, don’t ask anybody to give you insider information from the company, as you will both land yourself in serious legal trouble. So make sure you understand the laws and any workplace rules pertaining to insider trading.
Markets are people, and people need time to read, view, listen to information; digest it; and gauge its validity. So “the market” may not know what you know for a long time, sometimes for months, till the “new” information is in the news or translates into sales or profits in an earnings report. That will be too late to make as much of a profit, but if you were there waiting patiently for weeks or months sitting on a low price, then you will be rewarded when it goes up.
Regrets of acting and not acting on new information
When I was in graduate school, I worked in the wonderful lab of Dr. Thomas Gilovich, a student of Kahneman and Tversky. One of his research projects at the time demonstrated that the regret of inaction is worse than the regret of action. Basically, you’re more likely to regret something you had failed to do than something you had actually done. Personally, I found that this is also true in investing. In the aggregate, the regret of not buying a stock is worse than the regret of buying.
When, after some research, you think a company has something interesting going on, buy its stock. If it feels risky to you, just buy a little. It’s not all or nothing. You can take a small risk or even a tiny risk. Most likely, it’s easier to offload your small purchase at a small loss or zero gain than to buy it later at an unbearably high price. Remember, the higher the purchase or entry price, the higher the risk. Buying a small number of shares cheap can also keep that company in your consciousness. By seeing its daily fluctuations, you’ll be able to see if it is on the rise in time to buy some more before it is overpriced.
Fellow investors are equally blind to the future of a stock or the stock market. But they can be a valuable source of information about the process of investing. We all know that panic selling can be the kiss of death, but learning it from a real person can bring it home. An investor friend who lost money in the dot-com bubble had an interesting regret. She did not regret buying into the big dotcoms that crashed at the time. What she regretted was not sticking with them through the dot-com crash—because those same stocks skyrocketed afterwards.
Be scientifically-minded: it is not opinion but data that will be the final arbiter of the future.
We all have had the experience of over-confidence about the future. In the stock market, overconfidence can translate into buying too big of a position in a stock, for instance. You do your research, build up increasing confidence in the company, and perhaps a bigger position in the stock. You could be right on many counts, except for one crucial element. For instance, we can be so focused on the demand, that we forget about the supply. Or we were right about how great a product it is, but it turns out to be a small fraction of the company’s revenue, and therefore practically irrelevant to the stock price compared to a larger problem.
It’s important to keep in mind that your level of confidence about the future is merely a subjective experience in your mind, and, unless it is shared by the majority of investors globally, it will not affect the stock price.
As a psychologist trained in the scientific method, I have learned to counter overconfidence by reminding myself that my opinion is just a hypothesis about reality, still to be determined by actual data. As every scientist knows, real data more often than not ends up disproving our well-researched pet theories. That is why most scientists publish a fraction of the actual experiments they run. It is not easy to even describe reality, let alone predict the future.
So be agnostic about the future. The future is always entirely unknowable, no matter how sophisticated and well-researched, and confident anyone’s opinion or prediction is. After doing all that research, you’ll be a better investor if you accept that you know nothing than if you believe you know enough.