Wall street professionals. Do Not Open Your Mutual Fund Statements
In the closing credits of Austin Powers, Mike Myers in the title role is seen taking pictures of minx-like Vanessa (played by Elizabeth Hurley). As he takes photo after photo, Powers snaps his fingers while saying, "ignore this, ignore this, ignore me doing this." The joke is that it is even harder to ignore his snapping fingers when instructed to do so. In the context of photography, this little trick helps keep the model at ease and looking natural.
When it comes to investing, our inability to ignore extraneous information costs us money. With modern media and technology it is possible to get almost instantaneous information. Financial networks in the form of CNBC and Bloomberg TV allow everyone to keep up with breaking news. It is even possible for individual investors to listen in on some companies' earnings calls, right along with Wall Street professionals.
Robert Kiyosaki - Rich Dad, Poor Dad In earlier eras it took a long time for information to reach investors. Consider, for example, the effect of the battle of Waterloo on British financial markets in 1815. Early reports of the battle suggested that Napoleon was winning, and this caused the British markets to fall precipitously.
While the market was plummeting and sellers were panicking, Nathan Meyer Rothschild was calmly buying. Several days later, the news of Napoleon's defeat reached London and markets soared. This netted Rothschild got wordof gains. 14
What made Rothschild buy when others sold? He had advance information provided via the unlikely route of trained carrier pigeons that flew across the English Channel . Thus Rothschild got word of the French defeat several days ahead of others and was able to make a financial killing.
Can we all be Rothschilds by watching CNBC and listening in on earnings calls? The answer for most people is no. In spite of regulations making it harder for firms to release information selectively, by the time news is available to most people, it is too late to make profitable trades.
"Wake up will you, pal? If you're not inside, you're outside." So says Gordon Gekko (played by Michael Douglas) to Bud Fox (Charlie Sheen's character) in Wall Street Journal. Only those on the inside can trade profitably on news; if you are not sure if you are on the inside, then you are not.
The worst thing people can do is try to trade on news. Perhaps the second worst thing we can do is to even listen to that news. People find it difficult to ignore information.
A famous experiment by Professors Kahneman and Tversky shows the effect of useless information on analysis. In the experiment, people were asked to estimate the percentage of African countries in the United Nations. Before their guess, a random number was generated—in front of the participants—by the spin of a roulette-like wheel. If people were rational, the useless information from a random spin of a wheel would not alter their analysis. In fact, the people in this study were not able to ignore the information. Those people who saw a high number on the wheel had higher guesses for the percentage of African countries in the U.N. than those who saw low numbers on the wheel. 15
We are influenced by irrelevant information. This "anchoring" effect has been demonstrated in many different experiments. Anchoring, for example, is one good reason to make the first offer in a negotiation. No matter how absurd that first number, it often influences the final outcome.
Have you ever made a losing trade because of some talking head on TV, even when you disagreed with the analysis? If so, you know how hard it is to ignore a message, and how costly listening can be.
Jim Cramers Real Money Sane Investing In An Insane World Ignoring the news on the TV is one solid suggestion. It might even be useful to not open your own mutual fund statements. There is evidence that the more frequently people look at their investing performance, the worse they do. 16 When we see losses, we tend to make emotional decisions to exit positions. As we've learned most trades are bad ideas, and emotional trades are the worst.
For those who can't ignore information, the answer is to avoid it. A simple rule is to align your rate of information acquisition with your trading horizon. If you are a day trader, then by all means have the TV on and watch streaming, real-time stock quotes. If, however, you are going to make a few, unemotional adjustments to your portfolio per year, then I suggest that you avoid as much information as possible.
I suspect that an investor, who just read annual reports, or even a farmer's almanac, would do better than one plugged into nightly conference calls of corporate earnings.
Conclusion: Keep your financial news flow consistent with your decision time frame. As much as possible, turn off the TV during the day, and don't look at your portfolio.