Does more information make you a better investor?
With the explosion in financial media, we are surrounded by loads of information. You get it on TV everyday, you read it in magazines and you get it on blogs like mine!
But does more information necessarily make you a better investor?
I was reading a research paper on the above topic which had the following findings:
- Investment in financial information increases with wealth and risk tolerance.
- Portfolio Sharpe Ratio (return per unit of risk) decreases as investment in information increases, mostly because of a positive relationship between information-gathering and portfolio volatility. For example, those collecting financial information 2-4 hours per week have a Sharpe ratio 27% lower than those not collecting at all.
- Trading frequency increases, and portfolio decision delegation and diversification decrease, with investment in information.
Have you observed such things with your own portfolio or investments? In my personal experience I have found all of them to be true. I’d specifically like to emphasize on
“Trading frequency increases, and portfolio decision delegation and diversification decrease, with investment in information“
This behaviour is exhibited the most by individual investors. All this happens because more information leads to investors being “overconfident” in their own abilities. This overconfidence leads to increases in trading activity and higher account volatilities. You get news and information on a minute by minute basis and you are tempted to try out every single idea which is presented to you!
Sometimes, this overconfidence is reflected in having less diversification in the portfolios. This is because we get so confident of “our research on a particular stock” or of the “news” that we tend to invest all our money into it! A recent case in point might be RPL or RNRL. Many times I have seen just 2-3 stocks in an investor’s portfolios. All this results in “high risk” for the investor(reflected in higher Sharpe ratios).
To me a lot of information means a lot more confusion and chaos. I personally feel that it doesn’t necessarily make you a prudent and wise investor. Sometimes “less is more”.
Rey- Managing risks is a continuous process. It has nothing to do with markets going up or down.
I personally don’t agree with making such “predictions”. What is the source of this “extreme pessimism”?Is the constant fear that markets might come down sharply?
It can happen anytime. Its not necessary that it will happen this week or this month. It can happen anytime! More important for all of us is to learn to deal with this feeling of uncertainty. As long as you are in the markets, you can never get away from this feeling of “not knowing fully” about the future.
Ranjan
Spoke to soon … week aint over till it is over!
Stock Market is no place for dreamers. Wake up and get real friend.
Get out while you can. I know Sage wont be happy with my pessimism – it is his blog. Sage has consistently been talking about managing risks.
Time you saw the risk. You cant manage what you cant see.
Cheers
ReyMax
Hey Rey,
Your prediction about the Fed Cut and global indices going down was absolutely correct. But you missed the “bulls eye” on a very important point – sensex/nifty. Here your prediction/speculation went flat.
I strongly see that we are back in the bullish phase, that too when Reliance Industries is not participating in the bulls rally. This rally is mostly led by midcap and sectoral movement in large caps. We all know what took nifty from 4500 to 5500.
Imagine where would you see nifty once these biggies comes into play and lot more dollars come to Indian markets after Fed cut and FII’s (now we know most of them are registered).
Dont you see probability north-bound rather than south-bound?
Cheers,
Ranjan
Gautam- I never advocate that “ignorance is bliss”. All I am suggesting is that we need to avoid “information overload”. Our brains are not wired to process so much of information. There is a very likely chance that we feel confused or overconfident because of this flood of information!
Rey- Your observation is correct. In short term this market can either go 500 points up or 500 points down!
As of now I see probability of an upmove as slightly higher.
Interesting
i can see how it impacts the investor including myself. However I’d like to disagree about ignorance is bliss 
Yes, the ability to discern the right stocks from the “information constipation” is best left to systems and professionals like you 
That’s where I guess the delegation comes in!
Thanks for nice article.
REY–WAT WILL HAPPPPEN in NEXT weekK? DARATEE KYON HO merekoooo
Sage
Why is the next week the “Week of Learning”.
Well if you look at the charts there are only two weak supports between here and 4650. One Bad News and 4650 is 10 days away. In fact , between 5250 or there abouts and 4650 there is no support at all.
Here is where the Risk/Reward comes in. The risks are huge, because of lack of supports on the down side. Rewards are shrinking by the hour as stocks find new levels.
Too many bad news candidates on the sidelines, but actually Fed will deliver the “Bad News” this time. Cut will be 0.25% and not more. US and the World Markets will plunge. Sensex wont be spared.
Those who hv not learnt your lessons well, particularly about Risk and Greed, will be delivered the learning by the market next week.
Hence “Week of Learning” is upon us.
Cheers
Hozefa- Gammon looks good for another 100-150 bucks if momentum play continues in the short term. 520 is a good support on the downside.
Varun shipping looks good for an attempt at 100.
Both these stocks are volatile plays, so mind your risk as you trade these.
Rey- Why do you term the coming week as ‘week of learning’?
I feel you are referring the “greed” which has certainly crept in the last month or so where many stocks have doubled in a month. All I am hearing are stories of “some news” in stocks and a strong recommendation to buy those stocks based on “such news”.
Dear sage
Thank you for your reply on UTV. Sir , i would like to know about (Varunship & gammon) how is it looking on the charts technically ?? Short term targets please !!!!!
Best Regards;
I follow your blog very closely. Your desire to teach the retail investor to conserve capital and to make money is obvious. But are they learning?
Maybe the Market will teach them those lessons you may not have taught, and even those that you taught but they did not learn.
Coming week is the “Week of Learning” and he who is laughing at the end of the week is the one who has learnt his lessons well.
Keep up the good work.
Share- I try my best to give less and relevant information to the readers and the clients.
“Information overload” is the biggest challenge for any investor today.Imagine what will happen if you start acting on 15-20 ideas your broker sends you everyday? or you start acting on CNBC’s stock ideas on a daily basis?
The results are easy to see and imagine – the broker makes tons of money whereas you stand confused and end up with a big hole in your trading account!
Hi Sage,
You are right.If we want to watch news channels like CNBC or NDTV ,better watch in mute for for safe investment.Your site is more then more safe and adequate information.You are doing Great job for retail investors.God bless you.
Sharesingh