Before I started investing in stocks on my own in 2012, my investments were in mutual funds because I assumed stock investing was way too complicated and time-consuming. There are so many things we as investors are told we need to evaluate, such as: historical price trend, industry group, analyst opinions, money flow, relative strength to the S&P, debt to equity, earnings expectations, etc. But how do you find the time to research all of these, let alone know what each means?
There is so much information out there about stocks that it has become difficult for individual investors like myself to know what’s important, which can often lead to indecision, or bad decisions. According to Daniel Levitin, psychology professor at McGill University and author of “The Organized Mind: Thinking Straight in the Age of Information Overload,” more information has been created by humans in the past 10 years than in all previous human history, and yet the human mind can still only pay attention to up to three or four things at once. Any more than that, he says, and we begin to lose track and exercise poor judgement. Certainly, the dangers of information overload are especially perilous in stock investing, where good decision making and sound judgement are critical.
In addition, with the growth of the Internet in particular, investors are getting barraged with so-called expert investment advice. According to the July 2015 Modern Trader article, “False Prophets: How Financial Technology is Saving Investors from Financial ‘Experts,” “The financial media has exploded in size with the rise of the Internet, digital networks and 24-hour market news. Proliferation of opinion has expanded exponentially — from millions of tweets sent each day to countless financial blogs and news sites. More than 250 million visitors hit financial sites each month for unlimited market opinion and research.” Figures like these are staggering. With so much online financial information, it can feel impossible to know where can start.
The worst part about the overwhelming amount of financial information is that so much of it is actually untested, misleading, or outright wrong. The same Modern Trader article goes on to share this incredible statistic from TipRanks: “Roughly 86.5% of analyst recommendations have buy ratings, which are wrong 50.2% of the time.” It seems that despite all the information and opinions out there, taken in total, individuals are no better for it than flipping a coin.
What’s more, of television personalities, the article states, “Too often, on-air recommendations and picks are not backed up with sound data or back testing. Rather, raw emotion of personalities can influence the pick.” And these are the network commentators and media pundits who are trusted for their guidance and insight! Perhaps even more distracting are the opinions coming from social media, web forums and bloggers, who need not be accountable for what they say at all.
All of this information overload can lead to poor performance. While the S&P 500 has grown 9.9% over the past 20 years, individual investors have only averaged 2.5% (Note: inflation has averaged 2.4% on top of that). Why? People buy on emotion, and a lot of this is connected to information overload. According to a Berkeley study, people are more likely to purchase stocks of companies that have been in the news recently. Oftentimes people like to simply invest in what they (think) they know — companies they like, or that are headquartered close to where they live, or perhaps their employer. They make decisions based on emotion, not fact. Why would you invest like that? Emotion should never play a part in your investing strategy.
Information overload can be solved by starting with a reliable methodology that allows you to stay on top of all the critical information that can affect a stock’s price — but without the headache. In my “Novice to Knowledgeable” webinar series, I identify how to find winning stocks with just five simple steps. It doesn’t get any easier than that! I use a reliable strategy based on the Chaikin Power Gauge stock rating model, which cuts through the clutter and does the research and analysis for me.
The Chaikin Power Gauge was created by stock market expert Marc Chaikin; it’s based on an algorithm that combines 20 important factors, including earnings performance, financial metrics, and expert opinions to grade stocks. These factors are distilled into a simple, color-coded rating that indicates the stock’s performance 3-6 months out: green for bullish, red for bearish. The Power Gauge has been proven effective in recent real life examples, which gives me the confidence to depend on it when I’m evaluating a stock.
Using this simplified investing strategy, I tune out all of the “noise” that would otherwise interfere with my decision-making. My performance (I consistently outperform the S&P 500 and most money managers) is proof that you don’t need to bog yourself down in research or be a financial expert. Instead, you can build a killer portfolio by following a proven methodology you trust, like the Chaikin Five Step Method.
Click here to register for one of Sandy's upcoming webinars on how to build a killer stock portfolio and invest with confidence. The article “Tune Out the Noise: Invest with Confidence” originally appeared on Sandy’s byline page on Nasdaq.com.
Sandy Chaikin is a member of the DailyWorth Connect program. Read more about the program here.