It seems nearly impossible to avoid the financial press. Whether at the airport, the gym, a hotel restaurant or even at home on TV, the financial press always seems to have the latest and greatest trend, idea, stock tip or other “must-know” information. Frankly, it can be addicting.
A question I often ask myself is: “what do I do with this information?” I have come to believe that a person who consumes too much of this media runs the risk of allowing it to influence their financial plan, and this can be very dangerous. Most people believe they are immune to this sort of group-think. But I’m not convinced of that. When people spend too much time with the financial press, it is easy for investors to become speculators. What’s the difference and why should you care?
What is the difference between a speculator and an investor?
A speculator tries to time the market and guess which direction the market will head next and makes trades accordingly with a shorter time horizon than an investor. An investor, on the other hand, makes financial decisions based on a well-thought-through financial plan that focuses on long-term results. This gives the investor the comfort of having convictions independent of the market. These convictions elude the speculator. An investor is influenced very little by short-term market changes. If you don’t know if you are an investor or speculator, the market is a very expensive place to find out.
What is the value of being an investor versus a speculator?
The preponderance of the evidence suggests that the probability of investors meeting their goals is higher than the probability of speculators reaching their financial goals. This is why I believe it is essential to be an investor rather than a speculator. But that’s not the only reason.
Speculators experience a much higher degree of emotional strain, on average, than do investors. Speculators focus on micro-market-changes because they have to respond to them in real-time to achieve their goals. This reduces their ability to focus on other things in life that really matter, like work, family and charitable activities.
Characteristics of speculators
Speculators tend to be nervous. They often lack confidence that they have the right strategy in place and so are prone to trade too often and make short-term changes. In fact, speculators are plagued by having a short-term focus. They feel like they always have to be doing something rather than having the discipline and patience to allow their investments to achieve their expected value over the long term.
Speculators are preoccupied with the financial media and try to understand what’s hot and what others are doing right now. This leaves them with little information about how to build a plan for the future. They find comfort in being trend-followers and doing what is popular and seems to be working for others. They don’t want to be left out.
Characteristics of investors
Investors focus on long-term goals, making financial decisions based on what is most likely to help them achieve their goals for the future. This means they sometimes have to ride-out short-term market swings. The concept is that the market is not dictating our investment choices. Instead, our goals are dictating our choices. Investors often take a contrarian approach and do what is unpopular, going where the crowd is not and taking the road less travelled.
The true investor is always looking for opportunities to buy quality stocks with sustainable earnings growth at prices that are undervalued relative to longer term fundamentals. They also seek to avoid investments that do not offer the potential of an acceptable risk-adjusted return.
The problems with following financial media too closely
To aggregate a large audience, the financial press tends to focus on hot fads that seem to be working right now for a lot of people. So the question you have to ask yourself is this: is my financial situation exactly like the millions of people for whom this content was created? If not, it may be unwise to give their content and advice too much credence.
How we think matters
Suggestibility is one major focus area for psychologists who study human behavior. There is a great book on this topic called Thinking Fast and Slow by Daniel Kahneman. The book summarizes the research conducted with Amos Tversky, in which they identified recurring problems people face in trying to make good decisions.
They would describe the way a speculator thinks as fast, instinctive and emotional. The book delineates cognitive biases associated with this type of thinking, starting with Kahneman's own research on loss aversion. From framing choices to substitution, the book highlights several decades of academic research to suggest that people place too much confidence in human judgment.
What does this tell us? The decisions that we make will be influenced by the information that we focus on, so we need to take our time and think before we act and be more deliberative, more logical and be very discriminating about who and what we listen to.
Whitnell is not a law firm and does not give legal advice. The information contained herein should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents of this article are intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have.