Separate Information from "Noise"
from Investorama.com
Investment headlines sell newspapers and create investment noise. The media is motivated by headlines, and this noise is the lifeblood of today's media—whoever shouts the loudest creates the biggest story. The simple fact is that investment noise makes good headlines.
Noise investors believe that by regularly reading a financial publication, they become "insiders" to information that gives them some advantage. What noise investors don't realize is that chasing a hot stock or attempting to time the swings in the market are strategies that are costly to implement, have an extremely low probability of success, and are ineffective in adding value to your portfolio.
Information investors are the opposite of noise investors. Information investors understand how financial markets actually work, and they know how to use their financial market knowledge to consistently make money. Information investors focus on the overall investment strategy and portfolio, rather than viewing a specific investment in isolation. They have learned to figure out what information is useful, and what information is next to worthless.
When you hear bad news about a company, you need to figure out its impact on your investment. Here are some questions you should ask about any information, good or bad, that you come across that is related to a stock that you own:
How is this news likely to affect the profitability of the stock in the future, both in the short-term and the long-term? Even great companies occasionally stumble, but many often recover quickly.
Is this a problem that's specific to this company, or does it affect the entire industry? A company could be the subject of "bad news," but still be a standout among its competitors.
How is this news likely to affect the performance of this investment in your time frame? Or is the worst already over? In many cases, "bad" news is temporary, and may have little impact on a long-term investment.
Are there sudden changes in management that the company hasn't properly prepared for?
Before you decide to take action based on the fact that an analyst has "downgraded" or "upgraded" a stock, consider this: do you know the time frame that the analyst used in making the recommendation? Many analysts are only interested in stocks that will increase in price in a relatively short period. If you have a long-term horizon, this action may be a tiny blip in the stock's performance.
Remember, there are institutional traders and other professionals who have real-time news feeds and can act much more quickly than you ever could. Don't try to beat them at their game. Take your time, and make a careful analysis of the situation before you take action.
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