A food pyramid for info-hungry investors
Here we explain the four worst investing junk foods ... and some healthier alternatives.
The best way to lose weight and keep it off, say the gurus, is to avoid 'empty calories' - foods that provide lots of energy but that are low in nutrients. Think chocolate, potato chips, and sugary drinks.
Whether you want thinner thighs or a fatter wallet, the principle is the same: input = output. It makes sense, then, that to improve your portfolio's returns, you should avoid the empty calories of the investing world.
Your job as a diet-conscious investor isn't to avoid information altogether, it's to be mindful about what you consume. The ideal information diet is filled with reliable data and informed advice, and it's low in biased or inaccurate opinion pieces.
It's natural that we want to stay up-to-date with our investments, but you should watch out for information bias - our tendency to believe that the more information we acquire, the better our decision will be, even if the additional information is irrelevant. Reading and watching more news may not lead to better decisions, but it does encourage overconfidence.
We've put together what might be described as a healthy food pyramid for value investors in the accompanying chart. Here are the four main types of financial junk food to avoid.
Put down the hot dog
Hyped pessimism: News media loves to hold you at the edge of your seat and it accomplishes this by providing a constant stream of doom and gloom. When a stock dips 5%, it's in 'free-fall'. When things aren't running absolutely perfectly, it's labelled a 'crisis'. Unfortunately exaggerated language usually encourages risky behaviour and a short-term mindset. It also promotes active trading, which clocks up fees and taxes that eat into your return. Remember that the news is often sensationalised and that crises tends to spur action, management changes, improvements and cost-cutting.
Big claims: If someone offers you 'risk free' returns in anything other than government bonds, hold on to your wallet. In fact, any promise for a particular return - be it 15%, 10% or even 5% - is a sign to keep moving. There are always risks so think carefully about the downside. Watch for big claims that play to your greed - 'the next Amazon', 'it can't lose', or 'the company is expanding into XYZ which could be worth bazillions'. As Warren Buffett put it, 'When promised quick profits, respond with a quick no'.
Share prices: News or advice that emphasises a stock's price movement, rather than the company's financial and competitive position, is rarely worth your time, so stay focused on a company's fundamentals and think like a business owner. When investing, what matters is where the current share price stands relative to the company's intrinsic value, not what its chart looks like or a trend in buy and sell orders.
Short-termism: Benjamin Graham said that, in the short run, the market is a voting machine, measuring a stock's current popularity. But in the long run, the market is like a weighing machine, where the company's intrinsic value is eventually reflected in its share price. You're investing for the next 5, 10, 20 years, right? In that case, what happened in the market today probably doesn't matter much. As fellow analyst James Greenhalgh put it, 'Today's headlines might be exciting but they mean nothing. Instead what matters are the headlines five years down the track'.
Commentary that seems too pessimistic, too optimistic, or is focused on the share price or what will happen in the next few months, can still be useful - but remember to pair it with resources lower on our food pyramid so that you're grounding your buy and sell decisions on reliable, unbiased information.
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