Interesting read!!! 5. Most news is noise, not news
There is no shortage of financial news hitting my inbox each day. While I am a notorious headline reader, I brush off almost all of the information pushed my way.
The 80-20 rule claims that around 80% of outcomes can be attributed to 20% of the causes for an event.
When it comes to financial news, I would argue it’s more like the 99-1 rule – 99% of the investment actions we take should be attributed to just 1% of the financial news we consume.
Most of the news headlines and conversations on TV are there to generate buzz and trigger our emotions to do something – anything!
“Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits – and, worse yet, important to consider acting upon their comments.” – Warren Buffett
The companies I focus on investing in have thus far withstood the test of time. Many have been in business for more than 100 years and faced virtually every unexpected challenge imaginable.
Imagine how many pieces of gloom-and-doom “news” originated over their corporate lives. However, they are still standing.
Does it really matter if Coca-Cola missed quarterly earnings estimates by 4%?
Should I sell my position in Johnson & Johnson because the stock has slid by 10% since my initial purchase?
With falling oil prices lowering Exxon Mobil's profits, should I sell my shares?
The answer to these questions is almost always a resounding “no,” but stock prices can move significantly as these matters arise. Financial news outlets also need to blow up these issues to remain in business.
“Remember that the stock market is a manic depressive.” – Warren Buffett
As investors, we need to ask ourselves if a news item truly impacts our company’s long-term earnings power.
If the answer is no, we should probably do the opposite of whatever the market is doing (e.g. Coke falls by 4% on a disappointing earnings report caused by temporary factors – consider buying the stock).
The stock market is an unpredictable, dynamic force. We need to be very selective with the news we choose to listen to, much less act on. In my opinion, this is one of the most important pieces of investment advice.
6. Investing isn’t rocket science, but there is no “Easy Button”
Perhaps one of the greatest misconceptions about investing is that only sophisticated people can successfully pick stocks.
However, raw intelligence is arguably one of the least predictive factors of investment success.
“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.” – Warren Buffett
It doesn’t take a genius to follow after Warren Buffett’s investment philosophy, but it is remarkably difficult for anyone to consistently beat the market and sidestep behavioral mistakes.
Equally important, investors must remain aware that there is no such thing as a magical set of rules, a formula, or an “Easy Button” that can generate market-beating results. It doesn’t exist and never will.
“Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood…these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the models. Beware of geeks bearing formulas.” – Warren Buffett
Anyone proclaiming to possess such a system for the sake of drumming up business is either very naive or no better than a snake oil salesman in my book. Beware of self-proclaimed “gurus” selling you a hands-off, rules-based system to investing. If such a system actually existed, the owner certainly wouldn’t have a need to sell books or subscriptions.
“It’s easier to fool people than to convince them that they have been fooled.” – Mark Twain
Adhering to an overarching set of investment principles is fine, but investing is still a difficult art that requires thinking and shouldn’t feel easy.
“It’s not supposed to be easy. Anyone who finds it easy is stupid.” – Charlie Munger