At a glance
- A barrage of information confronts every potential buyer of equities, from tv channels to in-depth articles on economics
- When not at cross-purposes in their views, news and expert sources provide frequently and dramatically changing outlooks
- However, market movements in the short-term are often inexplicable and what can only be considered “irrational”
- The calm investor is best served by tuning out the majority of the information and only focusing on identifying the right companies
Let’s say you recognize the corrosiveness of inflation (Why do we invest?) and bow before the power that is compounding (The most powerful force in investing) and also realize the advantages of investing in equities (What makes equities so essential). Being a person of action, you get yourself an e-broking account and link it to a checking account and ensure to transfer some of your surplus funds into this account. Great! You’re all set to buy some stocks!
With not insignificant anticipation, you log onto your online trading account. Confronting you on the homepage is an array of options and pages to navigate. You click a few promising links to arrive at the ‘Buy’ screen…and freeze…
What should you buy? Should you buy stocks of the company you worked in for a few years, because you know they have been doing “pretty well”, or those of the automaker whose badge you see “most frequently” at any traffic light, or how about one of those telecom companies which must be “doing well” if they can afford to run hundreds of TV commercials a day?
You don’t believe that ignorance is bliss so you decide to arm yourself with the knowledge to venture into the world of stocks. You read the leading financial daily cover to cover, tune into the leading financial news channel, even log onto investment websites (ahem!).
Some snippets of what you’ll likely see/hear/read
“The domestic economic slow-down impacts certain industries and not others (…why not?), so you have to stay away from certain industries and stick with the defensives (…what’re those?)”
“The Fed taper will put a stop to foreign money flowing into emerging markets, so brace yourself” (…but until when?)
“European markets fall on Ukraine, China data” 3rd Mar 2014
“European markets rise on earnings” 6th Mar 2014
The TV channels look particularly convincing with their shiny tickers, the green and red arrows, shiny graphics gyrating all over the screen and of course, the talking heads…always the talking heads. With intimidating titles like “Head of Emerging Markets, XYZ”, “Chief economist, ABC”, they speak eruditely of why the markets behaved the way they did over the last few hours, and what’s to come with a certainty you can’t help but envy.
For instance, as of early March 2014, these talking heads speak about U.S monetary policy, Greece’s solvency, India’s current account deficit and the resulting pressure on the Rupee, expectations around Russia’s aggression in Ukraine and a full-blown world-war, impending Indian general elections and the possibility of a hung assembly, China’s slowdown…and so on…
You come away picturing the financial markets as this humongous complex system operating with the interplay of hundreds of “mega” and “micro” levers, which after a lot of whirring noises and escaping steam, spits out the impact on equities and their direction. And it’s a not an entirely unreasonable representation.
Except there are two problems with looking at things this way:
- Tracking all the moving inputs and their interplay would need supercomputing power, far beyond anything any individual investor could possibly stay on top of
- Once the system spits out what’s supposed to happen in the markets, a surly old caretaker walks over and scribbles all over it
This “caretaker” is what forms the behavioral component of investing. To put it bluntly, the collective irrationality of all the participants in the market more often than not makes a mockery of the pronouncements of the talking heads
Does that mean there is no value to tracking global economic news and stock movements? There most certainly is.
When it comes to trying to get the investing picture, instead of trying to anticipate the impact of each lever, it makes more sense to ignore the majority of the moving parts and only focus on the parts relating to identifying the right companies, at the right prices. The rest of it is background noise.