Mar 05, 2014 Here are five "news" items I have learned not to pay much attention to, if any at all. Peter Hodson

by 5i Research

Peter HodsonOne of the problems with investing is that there is simply too much information for investors to consider.

In the old days (that is, pre-Internet), investors needed to take a long-term view. Now, mere seconds after a company's quarterly release or other news event, millions of investors, analysts, economists and bloggers around the world can give you their instant take on what just happened.

 

Individual investors are bombarded with information, most of it conflicting. The result can be paralysis.

When I was a portfolio manager, I needed to learn what information to filter out. Otherwise, my whole day would be spent reading analyst comments and press releases instead of trying to find good companies to buy.

Here are five "news" items I have learned not to pay much attention to, if any at all.

  • Market experts

For every expert out there who thinks the market is going up, there is likely an equally smart person who thinks the market is going down.

By design, every single trade on the stock market consists of opposing viewpoints. Therefore, market experts have about a 50% chance of being correct.

Look at the fundamentals and come up with your own thesis. Remember, most television experts and bloggers have their own agenda in mind anyway.

  • Target prices

We believe all target prices do is generate commission revenue for brokers. Whenever a customer asks about a change in a target price, we always look at the history, and sometimes it is laughable.

Analysts will set a target price on a company at, say, $40, and call it a buy. But the same analyst might have called the stock a sell two years ago with a target price of $15. We see this all the time.

All target prices do is get investors to worry, causing them to sell way too early. Case in point: J.P. Morgan had an US$850 target price on Google 10 months ago. Now, the target price is US$1,325. Any investor who sold at the old target missed out on an extra US$375 per share.

  • Daily price changes

Sometimes markets and stocks go down, but that volatility is what also gets you the risk premium over safer investments. Sometimes there is a reason for a decline (weak sales, poor earnings); sometimes there is not.

Forget about the daily moves, though. Unless there is a negative fundamental change at a company, the underlying reason for most stock declines is that a large investor is selling. It happens. Get over it.

  • Weekly oil numbers

Every Wednesday, like clockwork, the U.S. oil inventory numbers come out. Whether a drawdown of inventories occurs or not can have a big impact on oil prices. But it means little for investors, unless they are actively trading crude futures.

If you are buying oil and gas companies, their production growth is far more important to their potential investment returns. Let the futures traders worry about daily oil moves. Focus instead on what your oil and gas company is actually doing instead.

  • Analyst recommendations

Like target prices, you can ignore most recommendations. Again, the goal here is to generate uncertainty to trigger trading and commissions.

For example, Netflix Inc. (NFLX/Nasdaq), now above US$450 per share, had a neutral rating (with a US$71 target) on it by a Sanford Bernstein analyst less than two-and-a-half years ago. We are not picking on one analyst here: we could find hundreds of recommendations that have little reflection on company prices.

Changes in recommendations can move stocks in the short term, but they cannot dictate company fundamentals. If a company does well, its stock will rise — regardless of what any analyst recommends. To save stress, read the analyst reports, but ignore the final recommendation.

The key to finding some good long-term investments for your portfolio is to do as much real research as you can. Ignoring "news" that is not useful can free up the time to do just that.

Peter Hodson, CFA, is CEO of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (www.5iresearch.ca).

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