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Stocks: How to fight the urge to react to news headlines

Photo: Getty

In a dream world, you’d make your investment decision, sit back and relax and only be woken up when a substantial change has occurred to question your original plan.

An extreme version of this would be the ‘ignore all financial news’ approach. Unfortunately, in practice this means that you can often miss key events.

Instead, a better approach is to be digesting news with the mindset of: ‘Does this affect my original thesis for investing in this business?’

If you find yourself regularly reading news and questioning your decision, this could be a result of conducting insufficient research before investing into a company. It will be harder for you to quickly digest news and know if it is meaningful if you don’t have a solid knowledge of the company.

Considering that the price of a stock reflects the market’s expectations of future earnings, it is important to understand how the stock market reacts to news. When the market reacts to a piece of news on a company, that is essentially shareholders and investors collectively updating their outlook for the company.

For example, if a company beats earnings expectations and the share price increases, this is the market saying: “I now believe they will grow more than I previously expected” or “I have a higher confidence in them achieving the growth expectations”, or both.

The market often over- or under-reacts to news. For investors, this can present opportunities and distractions. I personally feel investors should never feel ‘rushed’ regarding making an investment decision.

A few top tips of mine to help fight the human tendency to overreact news:

  • Don’t ever feel rushed to make a decision
  • Assess whether the news affects your original reasons behind investing in the business;
  • Consider that the market reacting to news might present a buying rather than a selling opportunity.

When reading news, or any investment research for that matter, the most important question to ask is whether the source has a bias or conflict of interest. This is the case for far more sources of information than one might think. A couple of examples:

  • Articles (usually press releases) from the company itself, or a PR agency on behalf of the company. The bias here does not need explaining;
  • Articles from external contributors. These sometimes have a vested interest in the stock they are covering, an example of this would be the US/Israeli site Seeking Alpha where anyone can submit research. Typically, authors are required to disclose any interest they have;
  • Tweets or social media messages from users who from their history clearly have a position in the company.
Beware where you get your news from. Photo: Getty

Finally, onto finding good sources. I’ve already recommended you seek sources that have reliable and unbiased coverage on the companies you invest in. Even better if those sources also align with your investing style/strategy.

This is not an extensive list, just a collection of ideas beyond the obvious:

  • This might sound strange and not technically news, but don’t lose track of the underlying fundamentals. My business Simply Wall St gives investors access to this kind of unbiased information in a visual, easy to understand way;
  • Hunt out niche sources such as industry specific (or even better company specific) blogs or newsletters, or ones focused on a specific investing style. Two examples would be The Interface (coverage of Facebook) or Ethical Equities;
  • Social media accounts of people with a good understanding of the industry or company;
  • Likewise, social media accounts of key management can often provide interesting insights into their mindset, or how they personally react to external/ internal events;
  • There are heaps of sources of general macroeconomic level news, find one that resonates and provides consistent analysis of what these events mean for the market.

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