We all realize that financial markets react immediately when there is news, good or bad, that may affect a region or sector of the economy. Sometimes we even hear that the markets “ahead” or “anticipate” the facts.
This happens because in the short term, the prices of financial instruments, both shares and debt instruments, move based on investor expectations. In fact, many financial intermediaries and economic analysts offer “base” scenarios that guide investment decision making.
So, when in real life “risks” or “data” are observed that can modify the variables and therefore the expectations, many market participants react accordingly. Especially those who are more speculative.
Information, thus, is one of the main players in financial markets. Ideally, all participants in an efficient market should have the same information. But even in that case, some may interpret it in one way and others in another, in addition to having different investment objectives.
In any case, it is a fundamental element because it provides transparency to the market and allows decision-making. However, excess of it also causes a lot of noise that can confuse many people. That is why it is important to learn how to filter and know how to differentiate the data that is useful to us and those that only distract us.
Different companies and media participate in the information industry, some with well-defined codes of ethics, and others with the sole mission of selling. Many times the content responds to certain commercial or editorial interests, even if it is not paid for.
On the other hand, unfortunately many strong, irresponsible and scandalous headlines are created in order to increase visits to an article or circulation to an entire portal or medium. In fact, many people share them and comment on the news only because of its title, without even having read the content. Those generated in the financial sector are often ideal for this purpose.
There are people who rely solely on publications to build their investment strategy. They are the ones who think that by regularly reading financial publications and following the recommendations of the “experts” who write in them, they have an advantage over others. They don’t realize that chasing “hot” stocks, or trying to follow the sudden movements of the markets, are expensive strategies and that although they can generate occasional profits, they have a very low probability of success in the long term.
On the other hand, those who are truly informed have a good understanding of how the financial markets move and know how to use this knowledge to consistently increase their wealth over the long term. Informed investors focus primarily on their investment strategy: on managing their risks and on the composition of their entire portfolio in line with their objectives and investment horizon. They don’t pay much attention to the volatility of specific stocks or isolated market movements, unless they really pose a risk to their portfolio. They have learned to differentiate the data that is truly useful, from the hype junk.
In my experience, when faced with any information, one should ask whether it substantially modifies his investment thesis in the horizon that he has defined. For example, for people who are building long-term wealth (more than 20 years), short-term news should not cause them to change the entire investment strategy.
Sometimes it can be news that affects a company in which we are investing. Here we also have to know how to differentiate whether it is a material change in the business or in the fundamentals of the company, or simply an occasional stumble that does not change its prospects in the longer term at all.
In the event that some analysts have changed their recommendation regarding an instrument, what have they based on to do so? What investment horizon have you considered for this purpose? Many analysts are only interested in the performance of the stock in relatively short periods (maximum 18 months). However, at longer terms, the situation can be very different.
Let us remember that if one has a correct and representative diversification with respect to its benchmark, the asset allocation explains more than 90% of the portfolio’s performance. Not so much the selection of individual instruments.
Finally, it is important to remember that there are many institutional investors who have real-time news resources and systems that allow them to act much faster than we do. We must not try to beat them at their game, nor can we. It is better that we always take our time, and make a careful analysis of the situation before acting, taking into account, as always, our investment horizon and our risk tolerance.
