Investment research has changed a great deal since I first got involved in it in 1964, at age 16, when I got a part-time job as an assistant to an investment writer. Back then, and for many years after, you had to call or write companies to get them to mail annual and quarterly reports. You had to dig through stacks of dusty newspapers to get stock prices and market index history. To compare statistics on companies, you used a clunky adding machine and went through lots of pencils and paper. In the process, you picked up all sorts of information and background on a lot of different companies. In researching one stock, you often stumbled across another that you liked even better. One of the drawbacks of stock research in the digital age is that the Internet makes it all too easy to gather information on, and pay way too much attention to, one or a limited number of investment indicators or types of investment information. Examples include free cash flow, p/e ratios, insider buying and selling, mutual fund cash reserves, investment newsletter confidence rankings, and on and on—the list is endless. Focusing on any one of these can pay off from time to time. But it’s bound to cost you money eventually. That’s because there is no cause-and-effect relationship between any one of these and the future price of a stock or the market index. The importance of any one factor is low enough that it’s bound to be overshadowed by combinations of other factors. [ofie_ad]
What will it cost you if you’re wrong about a stock?
I’ve found over the years that you’re far better off to look at a wide variety of information. Of course, you need to be selective. There’s always too much information available to consider it all. Try to take in too much and you quickly run into diminishing returns. Above all, you need to know enough about a stock to form an intelligent opinion of how much it’s likely to cost you if you’re wrong about it and it fails to live up to your expectations. Of course, from time to time you’ll under-estimate the potential for loss. That’s why we continually remind investors to follow our three-pronged program of investing in well-established companies, diversifying across most if not all of the five economic sectors and avoiding overly-hyped stocks in favour of out-of-the-limelight stocks that may offer hidden or little-noticed value. No matter how widely or narrowly you cast your information net, some of your investments will disappoint you. But that won’t matter if you apply those three points. That’s because your near-inevitable gains will overwhelm your all-but-unavoidable losses. COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members How has the Internet changed the way you invest? Do you find yourself spending more time or less on investment research? Let us know what you think.
