To investors who watch the equity markets on a minute-to-minute basis, the world often seems to be tumbling from one aspect of a permanent crisis to another. On May 15, as the Karnataka election results swung this way and that, the stock markets swung along with them in lockstep. It was quite a breathless day for the anchors of the stock-trading channels (who mistakenly call themselves business channels). They were almost as breathless as the general news channels, who at least had some excuse for the hyperventilation. At the end of the day, what did investors gain by following the antics of the markets? In one word, nothing.
If you had received a summing up of the day's events in two or three sentences late in the evening, we would have been just as adequately well-informed. In fact, if we just receive one sentence after a few days when the Karnataka affair is finally done and dusted, it would be just as well. Mind you, I'm not saying that who runs an economic powerhouse state like Karnataka is not important--it's crucially important. What is not important is for us, as equity investors, to be informed about each and every twist and turn every single minute and then react to it constantly.
Typically, investors look at events like this and try to figure out whether they should change their investment plans in response to all these. The most common idea that investors get is that there's uncertainty or volatility and perhaps they should wait and not invest. Unfortunately, this idea is completely wrong, and on two levels. Firstly, there is no way to predict what the long-term impact of any of these events will be. Secondly, if current events do indeed portend bad times for the equity markets, then surely that's a reason to invest rather than not invest.
Investors should treat news events--almost all of them--as nothing more than noise, and pay attention only to what they themselves have to do. The biggest bane of investors' life is to mistake noise for actual information. During big-ticket news events, the signal-to-noise ratio is even worse than usual.
However, fundamentally guided investors know now that they must stay rooted to the reality of what is happening. The big picture is not always relevant. Sometimes, the individual trees are more important than the forest.
It's no one's case that events do not have any impact. However, it's impossible for the individual investor to map them sensibly to any action that they can take. We've had a string of high noise events over the last few years, emanating from various crisis around the globe. Remember the week of Brexit and Trump's election? However, I cannot recall any where the obvious first response has eventually proven to be anything but a counterproductive knee jerk reaction.
In fact, there's a reasonable argument to be made that the less we know, the better investors we make. 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 is that excessive information hides knowledge and prevents understanding. Our mental and cognitive bandwidth, as well as the time available to us, is limited. Most of the information flow we are faced with 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.
Eventually, investments made in bad times earn much more than those made in good times. Either way, the best thing to do is to recognise the daily flow of news as noise and make sure that it does not disrupt your investing plans. Good companies are good investments in bad times too and conversely, bad companies are terrible investments even in apparently good times.
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