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What's important, what's not

Though it may sound counter-intuitive, not paying attention to most events is the key to long-term wealth creation in the stock market

What's important, what's not

As an equity investor, it looks like that your main job is to absorb and analyse information and then use it to make investing decisions. However, the real job may be to ignore information.

The reason, as we will see in this article, is that excessive information hides knowledge and prevents understanding. Let's understand this. Taking a one day sample and projecting from that, it seems that each business news channel in India (there are about seven of them) covers about 60 to 100 news items a day. Most of them are duplicates of the news on other channels, but perhaps 20 to 30 are unique. Add to that the enormous flow of facts and opinion on Twitter, Facebook and, for some people, on WhatsApp. And on top of that, there's a large amount of foreign news that could impact Indian stocks. Not just that, in these days of interlinked markets, most of us accept that events in some influential equity markets directly impact other markets. It could all easily add up to hundreds of more items to mentally process every single day.

Our mental and cognitive bandwidth, as well as the time available to us, is limited. If we spend these precious resources processing this flow, then we cannot think about what we actually need to. Most of this information flow is like junk food for the brain. We cannot become healthy by eating healthy food in addition to junk food. First, the junk food must be eliminated. In fact, our new premium stock analysis and advisory service, Value Research Stock Advisor is based exactly on these ideas of focusing on a small amount of filtered information that is relevant.

My guess is that if you set out to monitor all the news that is pouring out of the mass media and social media, you would have to deal with about 200 to 300 pieces of information every day, at a minimum. It's easy to convince yourself that all of it is important and all has to be monitored. Look at the events of the past few weeks which include US interest rates, Trump's steel tariffs, elections in the North East, PNB scam, by-elections in UP and Bihar, oil prices, trade war threats. Each of these has been presented as something that investors must monitor and understand and react to, too. And, of course, there is no shortage of investors who reacted to these. In response to most of these events, stock prices jumped around violently.

However, most of the time, there is no news in these news outlets that could be useful to you as an investor. The opposite is also true -there's nothing here, which, if you miss, could be harmful to your investments.

To many people, this would seem like a surprising or even a shocking thing to say. It seems almost axiomatic that the fate of equity and other investments depends on what happens in the world and that news is the way we find out what is happening in the world. After all, the entire business news media surely exists only to serve this need. In fact, business news on TV seems far more dedicated to this idea than does business news in newspapers. The anchors always seems to be implying that whatever happened over the last couple of hours is the most important thing that has ever happened. It's as if the whole of human history had been carefully sorted in an ascending order of importance and there was never a day in the past that was more important than today.

Could that be true? Obviously not. To explain this, let's discuss the US presidential elections. Not the 2016 ones, which elected Donald Trump, but the ones in 2012 when Barack Obama was re-elected. On the morning of November 7, 2012, in the hours after Obama's victory became certain, there took hold a view that this was going to be a disaster for India. Supposedly, the reason was that Obama was going to 'crack down' on outsourcing and the prospects of Indian IT services firms were going to become much worse. It all appeared to start from a casual comment from an IT CEO that Obama had probably seemed more concerned than Romney (Obama's opponent in those elections) about job losses to outsourcing. From there on, one commentator after another took this up, with each one trying to be competitive about being able to foresee an even stronger impact. It was like an echo chamber, with each echo shriller than the previous one.

What would have happened if on that day a TV anchor called up an IT executive and asked if this could be a threat to Indian IT outsourcing and the executive had replied truthfully, "No, nothing will happen"? That executive would never have made it to the TV. In fact, there may have been many who actually said that and were ignored. They would quickly learn the lesson that the next time someone asks them, they should reply, "YES, OH MY GOD! THE INDUSTRY IS GOING TO BE KILLED." Conversely, the people who are talking about their specific companies have an opposite, happy view to propagate, regardless of the truth.

Even the stock prices and indices themselves hold almost no useful information on a day-to-day basis. For example, look at the accompanying graphs. The three graphs show daily, yearly and five-yearly graphs for a 25-year period. Compare what knowledge you can derive about what the markets were doing. You will immediately realise that paying attention to the daily graph is not just useless but actually harmful.

What's important, what's not

What's important, what's not

What's important, what's not

The collective message that is delivered to the investor implies that monitoring the hourly impact of short-term events on investments is the most important thing an investor should do. If you look at your actual investment track record, you'll likely discover that the strongest impact - positive or negative - came from things that took months and years to develop and that you had a lot of time to understand them and react to them. In fact, it is probable that the worst investment decisions you took were quick reactions to news that looked important at the moment.

Which is exactly where Value Research Stock Advisor comes in. Our premium service cuts through the noise and maintains a short list of stocks that we recommend - stocks that we are confident about will stand the test of time.