What type of information will help your bottom line?



What type of information will help your bottom line?Here’s why more information won’t help you:

In theory, information should make the stock market’s world go round. Information about companies and their ability to make money in the future is what should determine share price.

As the market learns of new information, price is adjusted up and down to reflect the value of that information.  This implies that investors should focus their analysis on information so they can predict where share prices should go in the future.

While this makes good sense, I have found it to be extremely rare that investors who use information are able to consistently beat the stock market.  With smaller retail investors (most of us reading this) in particular, the use of information for making investing decisions is more destructive than it is beneficial.


10 Reasons Why Using Invaluable Information May Be Destructive To Your Bottom Line:

1. Information Causes You to Ignore the Market’s Message

When you have an understanding of a company’s story, there is a tendency to fall in love with that story and ignore new information that goes against your outlook for the stock.  This leads the committed shareholder to hang on to a losing position, allowing the loser to bog down the performance of the overall portfolio.

2. The Market May Not Be Trading On Fundamentals 

In theory, stock price is based on the present value of future earnings expectations.  In practice, there are often very non-fundamental influences on share price.  A large investor that has a liquidity crisis may be forced to unload a large position with little regard for price. Often, the laws of supply and demand affect share price even though theory tells us that they should not have an influence.

3. Your Interpretation May Not Be the Same as The Market’s  

Our mood affects how we judge information and the same can be said for the market in general. Your fundamental analysis may be correct in an optimistic environment, but if the market is in a pessimistic mood, the investment can lead to losses. Even when the market is wrong, it is right.

4. We Tend to Focus On Information That is Easy to Get

We often look for the easiest way to achieve a goal. With information, there is a tendency to focus on the information that is front of us. Rather than work to find something to disprove our thesis on a stock, we instead look for information to strengthen our thesis. In doing so, we present our own biased outlook for our investment decisions that can often be VERY incomplete and wrong.

5. Information is Usually Already Priced In 

Most investors use publicly available information. That means it is widely known and available to anyone considering the stock. If information is available to a large number of investors then we should expect that the market will have priced that information in to the stock. Therefore, the information has not value to us.

6. Information Usually Comes with a Bias

As a general rule, people do what they are financially motivated to do.  If someone is encouraging you to purchase a stock, there is a good chance that they have some financial motivation to do so. Before you trust the information you receive, understand the financial motivation. If you find the reason, you will often find that there is a strong bias in the information being provided to you.

7. Trading on Truly Insider Information is Illegal 

There are few risk-free trades in the stock market, but trading on significant, inside information is one. You stand to make a lot of money buying stock in a company that will be acquired by another at a premium tomorrow. If you have that information and act on it, you are trading on inside information and that can land you in jail.

8. Gathering Good Private Information is Expensive and Time-Consuming

There are investors who are able to uncover information that is not priced into a stock but is not considered inside information. This private information is valuable because it can lead to market beating returns. However, gathering private information typically requires significant resources, knowledge and time. For small investors, it is not feasible to do this kind of work across a broad range of stocks.

9. You May Not Have All of the Information You Need

The market tends to focus on two or three key information points that affect the price investors are willing to pay for it. An investor who does a thorough fundamental analysis of the stock may still have an incomplete understanding of the company’s business. If missing one of the key points, this investor can make a gross error in valuing the stock.

10. There Is No Standard for What Information is Worth

There are many formulas for determining what a company’s share price should be.  Many fundamental analysts look for stocks to trade at a certain multiple of their earnings with that multiple to be based on growth.  However, there are great variations in accounting methods that can have a profound effect on how earnings are reported. More importantly, there is no rule that a company should trade at a certain multiple of earnings, that target multiple is just an opinion.


The Bottom line:

Ultimately, I look at the market’s interpretation of all available information when I look at a chart of price and volume. It shows not only every bit of information detail but also what the market thinks of it.


Check out some of these posts:


Here are more articles you may like

Claim Your Free Guide Today

Give us your email and we will give you the tools to change your life. 


Learn about Early Entry Points & much more...

© ChartYourTrade | Contact us: website@chartyourtrade.com

Disclaimer: All communication from ChartYourTrade is general in nature and for educational and general informational purposes only. Under no circumstance should it be considered personalized investment advice. All our work is general in nature and not specific to any one person. All the information on this site and/or that originates from us, or any of our partners or affiliates, is for educational and informational purposes only and is NOT a recommendation to buy or sell anything. To avoid any conflicts of interest, we do not have a working relationship with any of the companies mentioned in our work. Furthermore, we may have a long, short, or no position in any, or all, of the names that appear in our work and they may change at any time without notice. Investing and trading in capital markets or using margin carries a high level of risk and may not be suitable for all investors. Leverage can work against you as well as for you. Before you decide to invest or trade in capital markets you should carefully consider your investment objectives, level of experience, and risk appetite, among other factors. The possibility exists that you could sustain a loss of some, all, or more of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with capital markets, investing/trading, and seek specific investment advice from an independent financial advisor and other professionals. Remember all the information we provide is for educational and general informational purposes only and is subject to change without notice.

Charts and Data are courtesy of MarketSmith Incorporated. Join MarketSmith here.

Terms of Service