One of the benefits of living in the modern world, is that information is so unbelievably available to us. No matter what the subject, you can easily type in a few words on your phone and pull up all kinds of sources from all over the world on exactly that topic. This has also been supplemented with 24 hours news networks, news apps with constant notifications, and social networks with information, stories and images. It can be overwhelming at times.
When it comes to investing, the amount of information and news can be both a blessing and a curse. While it is fantastic that we can pull up financial data and research on pretty much any publicly traded company in the world with ease, the downside of this much information is that it can influence us emotionally which can often lead to mistakes.
Real investing takes patience. You shouldn’t invest in something unless you intend to hold it for at least 5 years. Anything shorter than that, and I wouldn’t call it investing any more. I would call it speculating, and speculating is risky.
Despite the risk, most “investors” nowadays are actually speculators. We can see this by looking at the average holding period for companies traded on the S&P 500. In the 1960s the average holding period for a stock in the S&P 500 was 8 years. By the year 2000 that holding period had shrunk to one year. Currently investors are buying and selling their stock every 6 months or so. That means that the average investor in the stock market is buying businesses with the intention of owning it for less than 6 months.
So if speculation is risky, then why are the average investors speculating? I think there are a few reasons related to our modern society which has contributed to this shift in investor behavior.
Technology has become much more convenient. With technology today I can identify an investment, analyze it, make a decision to buy or sell it, and then execute that decision in a much faster, much more efficient, and much less costly way then would have been possible even 10 years ago. This is good from the sense that it allows us to invest in a much cheaper and more efficient way, but it is bad in that because it’s so easy to trade, we are encouraged to trade a lot more. As I’ve mentioned too much trading is not positive for your investment performance.
Investor Psychology and Popular Culture
Technology has also influenced investor psychology. There are many more investors nowadays who fear missing out on great investments because they see other people on TV or on social media who seem to have gotten rich quickly and effortlessly. The fear of missing out is the root cause of all investor bubbles, from the tulip bubble in the 17thcentury to the cryptocurrency bubble in 2018.
This has also been exasperated by the glamorization of wealth on social media and in popular films like the Wolf of Wall Street. Because of this, investors feel a very real psychological need to keep up with the Jones’s.
Investor psychology is a huge problem for most investors at the best of times. In our modern world it is almost impossible to overcome without outside help.
Changes in Media and Reporting of Business News
When 24 hour news networks became established in the 1990s, it was only a matter of time before business news networks also became popular. When you have networks which are devoted solely to business news, 24 hours a day, 7 days a week, that is a lot of time that needs to be filled. Very often these networks have filled the time by focusing on more short term stories. They do this by necessity because they are usually more entertaining, and it’s the only way they could possibly fill up their day.
This focus on the short term however has led analysts and viewers to only focus on the short term in their own investments. In fact it’s made it seem more normal that investors should be trading rapidly in and out of stocks. This normalization of very speculative behavior has probably been one of the worst things to come out of modern business news. It has cost investors billions.
There are other reasons of course and I could go into a lot more detail on each of the above reasons and expand upon the drastic impact they are having. But I think the more important thing for investors to know is what to do about it.
Let’s compare publicly traded stocks to another investment that almost all of the people reading this would be familiar with. That investment is of course, your own home. Most owners of homes are not checking CNBC or BNN daily to find out how their home price is doing. Because of this, investors are often times a lot more successful with their investment in a home then they are with their investments in publicly traded stocks. This isn’t because your home is a better investment than the publicly traded businesses (It almost certainly isn’t - Stocks vs Real Estate). No the reason that more investors are more successful with their home is that their own behaviour is much better. It has more to do with them then it does with the quality of the investment.
Now you could argue that it wouldn’t make any sense for someone to tune into a news network to find out the value of their home. The news they report wouldn’t apply to the value of their home except in very rare cases. However when I look at the businesses my clients and I own, the news that is being reported on business networks is equally inapplicable to our ownership stake in those businesses. Even when they do talk about businesses we own, they very rarely analyze that business from the long term perspective of an investor. Instead they focus more on the short term price movements which would only be of interest to speculators. This news doesn’t apply to us. We can control our behavior accordingly.
This is great, because if there’s one thing we can control with investing, it is our own behaviour!
When I invest in a publicly traded business, I pay very little attention to what’s being said about those businesses in the news. Instead I focus on the important things a business owner should care about:
1. How much money the business makes,
2. How sustainable those profits are, and
3. What amount of money should I expect to receive as a shareholder.
When I see bad news on BNN, I don’t worry about that stuff because I know that I own great businesses that are going to do well regardless of who the President is, or what the economy is doing at this very second. That news doesn’t apply to me. When you see worrisome news on BNN, in the newspaper, or on social media, you should repeat the mantra… The News Doesn’t Apply to Me. If you do that, success with your investing will become a lot easier and a lot more common.
- Craig White, BA, LL.B., CIM
Craig White is an Investment Advisor at the award winning firm Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Craig White an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.