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And we encounter many more such headlines on a daily basis. We are subjected to a barrage of information - with TV anchors interviewing market gurus on stock tips and market outlook on 24/7 news channels, news papers and apps recommending one stock or another, brokerages coming out with research (often not-so-well researched) reports with most recommending a 'buy' action, continuous prices updates on stock tickers, 'market experts' showing their one-upmanship on Twitter and other social media apps, and of course the WhatsApp and Telegram groups, with daily recommendations from traders, 'well wishers', and the stereotypical uncles who always know the market pulse.
Contrary to popular belief, this information overload is giving you a disadvantage rather than an edge when it comes to investing. Most information we consume is just noise. Irrelevant, distracting and misleading noise. We react (and often overreact) to this noise, and make decisions which harm us in the long run.
Pessimism sells
As Morgan Housel said - "Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention." We react much more to negative news, and rightly so from an evolutionary perspective, where if we didn't, we would probably be eaten up. Hence, we live in this state of skepticism - of the next COVID wave, or the next Lehman moment, or the withdrawal of Fed stimulus, or the risk of inflation eating into our returns.
While there is no denying there are always going to be things we should worry about, it is a reasonable assumption that the world has improved over time, and with it, so has wealth creation in general. Per capita incomes have risen, more people have moved out of poverty over time, and our life spans have doubled. Once we expand our time horizon, both in the past and the future, we can set aside some of this pessimism, and get a broader perspective.
We are suckers for instant gratification
How often do you check your stock portfolio value? Have you had this urge of refreshing it every few minutes hoping for a higher gain or a smaller loss? Have you acted (reacted) on such price movements without a reasonable analysis / thesis?
A couple of decades back, most retail investors got their portfolio statements in mailers, generally on a monthly or a quarterly basis. Today, with mobile apps and cheap internet, we are able to access this information instantaneously. At the click of a button we are able to access price trends, charts and patterns, people's comments and news on every stock out there. While we have all this information at our fingertips, we lack the ability to weigh this information and take carefully considered decisions with it. Instead, we almost always take impulsive decisions heavily influenced by our biases. In this case, the recency bias - where we give an inordinate weightage to recent events coupled with loss aversion - our tendency to feel more pain from losses than pleasure from an equivalent gain.
Behavioral scientists Richard Thaler, Daniel Kahneman, Amos Tversky and Alan Schwartz conducted experiments with investors who were given periodic feedback on their investment performance, where they concluded that "Providing such investors with frequent feedback about their outcomes is likely to encourage their worst tendencies. …More is not always better. The subjects with the most data did the worst in terms of money earned." They termed this tendency as 'myopic loss aversion'.
A skewed world view, shaped by survivors
Only people who have succeeded (either through luck or skill) are called for interviews on news channels, have thousands of followers on Twitter, and have a lot to say about stocks, businesses and life in general. The ones who don't succeed are silent. We don't get to hear or see the 99% who didn't succeed as much, or actually failed and hear only from the remaining 1% of survivors. Hence this skewed population largely filled with people who have succeeded give us the impression that everyone is succeeding - but us, due to what is known as 'survivorship bias'. This again makes us believe that we must be doing something wrong, and makes us act when we really shouldn't. We need to drown out the noise of the survivors, and listen to the silence of the dead (who haven't succeeded), for that's where we'll get a realistic view of the world.
Forecasters always make poor forecasts, especially where the forecasts matter
In December 2019, not one person predicted that a large part of the world's population would get locked inside their homes, or that work from home was even possible in most places. Nor did the news headlines predict that the markets would rise with a vengeance post March 2020 (on the contrary, there were a number of doomsday predictions).
In 1945, Germany's GDP fell by 50%. No one predicted that a year or so back. In 1950, West Germany's GDP surpassed it's pre-war highs. No one predicted that either.
The fact is - people are poor at predicting things. Even for the so called 'market experts'. Their track record isn't any better than that of a series of coin flips. A vast majority of the reports predicting industry growth rates, GDP growth rates, stock market movements etc. prove to be wrong when compared with reality (the ones that do pan out to be true, are usually by coincidence). Moreover, you will find contradicting opinions from different experts on the same topic. In such cases, we often accept the view which confirms our own belief (confirmation bias). However, given the reality that most forecasts are wrong, we need to understand that they are largely noise, and learn to ignore them as well.
How then, do we down out the noise?
Improve the SNR (Signal to Noise Ratio - sorry, couldn't control the geek in me): Curate what you read. With the internet you have limitless amount of information (which is noisy) on your fingertips. Read / listen to / watch things which help you learn something, understand something better - could be anything, from timeless lessons on investing and personal finance (like, hopefully, this page), to how the human body works, from evolution of species, to particle physics. Be selective, avoid focusing too much on commentary / predictions from market experts and influencers which populate a large number of news articles. 50% of them turn out to be wrong, and the ones that don't are largely irrelevant.
Delete portfolio tracking apps: If you open Moneycontrol.com every weekday at 9:15 AM, hoping your portfolio is not down (as an investor), then this is for you. If you evaluate your portfolio on a daily basis, it would be up or down ~50% of the time, giving you only noise, on a yearly basis, it would be up ~20% of the time, and on a 10 year basis, up nearly 100% of the time. Staring at the portfolio value and the daily change is not going to help move the portfolio up. It, however, is going to get you excited, and lead you to hasty action which would be driven by your biases rather than your investment thesis.
Use social media for entertainment, not investment advice: The number of #Fintwit gurus are growing exponentially. With most of the recent additions being relatively new investors who have probably made money in the recent bull run, but haven't seen a complete market cycle. Even if they made it because of their skill and temperament (as against dumb luck), their 'advice' would almost always not work for you. Do remember - your goals, income levels, lifestyle, behavior etc. are unique to you, and hence, a generic stock recommendation is not going to help you. As long as you use social media for entertainment, motivation, education it works. If you use it to get stock tips, replicate portfolios of others, or to judge your performance in comparison to others on twitter or Reddit - you are treading dangerous waters.
Irrespective of what we do though, we will never really be able to avoid the noise - but we need to find our own unique ways to drown it down, and protect our investments from it.
While I started writing this article over a week back, I think its relevance is even higher these days given the speculation over the Omicron strain of the Coronavirus, and its impact on the world. Hopefully, this helps you stay the course with your own investment goals!
Adios!
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