One of the crucial aspects of being an investor is reading the newspapers, particularly financial or business news. If you want to know how a company is performing or might perform in the future, the papers are the place to read about it. Or is it? Not all professional investors are keen on obsessively following the news. In fact, it might even negatively affect your judgment as an investor.
When news feeds into Innate biases
If you own considerable amounts in stocks belonging to a certain company, a bad headline may cause you to panic. Before you start selling off stock, stop and analyze what you have just read. Sometimes, the news doesn’t inform as well as we expect it to. In fact, news articles may feed into cognitive biases we have, such as the confirmation bias.
Confirmation bias refers to our innate desire to seek out sources that confirm what we already believe. So if you think marijuana stocks are going to perform well in the future, you may read only the headlines that are pro-weed stock. You may ignore those that rain on the parade, such as Attorney General Jeff Session’s stance against the legalization of recreational pot.
If you are against pot, you may focus on headlines that tell you to sell those cannabis start-ups stocks now. Neither scenario is helpful and in both cases, the news is not informing you. To avoid these biases when reading the newspapers, you need to be willing to listen to the other side of the story too.
Distinguish between legitimate news and opinion
Charlie Munger, the vice chairman of Berkshire Hathaway, and partner to the investing legend Warren Buffet, once said this at a Harvard graduation address: like Darwin, disprove your own theories. The father of evolutionary biology, Charles Darwin, was famous for looking for evidence that disproved his own theories. He did it so as to avoid bias in his own work and reduce the margin of error.
Investors are often recommended to follow Munger’s advice. If you read a headline that captures your attention and affects your investing decisions, don’t act on the new information right away. Read the coverage of the topic in other newspapers. More importantly, read articles that may present a counterpoint to what you originally read, but be careful here, it’s important to understand what you read.
Don’t believe everything you see posted on various blogs and opinion columns. Get your news from well-known and legitimate newspapers known for unbiased coverage of topics. Do not conflate news with opinion.
Don’t react to headlines strongly
The 24/7 news cycle can generate headlines that are badly sourced. This is not to say that you should distrust mainstream breaking news sources, but you should allow a story to develop before reacting on the investing front. If you panic or take immediate action, you may regret it when the story eventually takes a turn. Read the news thoroughly before you react. Some headlines are inaccurate, while others may only indicate temporary setbacks.
To know for sure, an investor would have to delve into multiple news outlets. Analyze the news instead of letting the headlines dictate to you. If you, like many others, are an investor who scans the papers daily and makes decisions right away, it’s time to stop. Learn to read the financial news correctly so you make the right decisions. Keep up with legitimate news sources, but don’t react to everything you see. Patience and willingness to dive deeply into a topic would protect you from making terrible, reactionary investment decisions.