Short Term Thinking is the Enemy of Investments

Investors are best rewarded when they take a long term view. By cutting out the noise surrounding markets and economies, investors are able to focus on those items that matter. More specifically, what the market has done on a day to day basis should not affect how you invest. Researching a company’s fair value is a more productive use of your time than tracking the movement of its share price. Once you have an estimate of fair value, you can then look at its share price and decide whether or not to buy the share, not the other way around (i.e. look at share price and then decide on a fair value).

The same principle applies at the asset class level. News items coming out on a daily basis are unlikely to change the relative attractiveness of an asset class and on their own should therefore not influence your investment positions that much. Assembling a range of information in the form of a mosaic style picture is a better way to use economic and other information than merely trying to interpret each item in isolation.

While headlines sell newspapers and advertising online, I feel that financial news reporters also have the responsibility to avoid focusing on the short term when reporting on investments. On Monday morning (25 January), before the markets opened, I saw a headline that said “All Share Index falls the most since January 20”. Now if my calculations are correct the ALSI fell 1.6% on Thursday 20 January, rose 1% on Friday 21 January, and then fell 0.8% on Monday 25 January.

Essentially the headline was highlighting the fact that out of Friday 21 January and Monday 24 January (two days), the performance of the ALSI was negative on Monday, and worse than the performance on Friday. Is this news? Scanning the headline, without pausing to think what it was saying, could prompt the reader to incorrectly conclude that markets were having a rocky time.

It would help investors if financial news reporters cut down on the number of ‘news’ reports that they churned out and rather focused on adding value to the end user. News reports should not merely rehash SENS (Stock Exchange NewS) reports, but rather look at the report (and possibly other related reports/news items) and attempt to interpret how that news item will affect the company/industry/economy. Clearly in the age of data overload this is easier said than done.

We endeavour, in our daily reports, to remain focused on the longer term. We often discuss newsworthy items, but strive to frame them (often with other news items) in terms of how they will affect your investments over a long term horizon. It is only natural that, as humans, we will sometimes be overly influenced by short term factors, but we attempt to ensure that this is the exception rather than the norm.

If you want updates on articles that we believe are worthy of being called news, click through to our Facebook page, and click ‘Like’ at the top of the page.

Take care,

Mike Browne
021 9144 966
info@seedinvestments.co.za
www.seedinvestments.co.za

Thu, 27 Jan 2011

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