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05 Oct 2020 by Pradeep U
How Much Information Is Good in Equity Investing? - Research & Ranking

Well, you may shrug off the above question, telling me, obviously it has simplified the whole investment process. The trend and the buzz word of today is 'Digital evolution'. And being an investor during such times may look like a privilege. Like seriously, investing in the 1980s was complicated and time-consuming, with information reserved only for a few privileged. But now, we can sit down in front of our computers and phones and do everything - from researching about the stocks and markets, using online tools to do quick calculations and then portals which allows us to buy and sell with a single click.

Investing indeed has become simpler, hassle-free and more convenient. But has it become efficient?

Meaning, is today's 'digitally empowered' investor making more returns than 'not so digitally empowered investor'? Are we taking fewer risks while making the same returns? Well, the answer is quite apparent - this information overload in the digital era has done more harm than good.

A majority of digitally empowered investors stay glued to the stock screen all the time, watching their stock prices continuously. If it goes up, they sell. If it goes down, they get upset. In short, any movement in stock prices triggers action from them. And to make it worse - they don't only look at the price. They also stay hooked to other news about the stock, industry, economy, markets, political developments, global cues, anything on WhatsApp or business channels that the anchors talk about.

So why does this happen? Let's take a quick look at a few of the myths.

The Myths Of Digitally Empowered Investor

  • Since journalists and anchors are talking about it, this information would be crucial.
  • There is a bombardment of information, and I need to analyse all of it to become a successful investor.
  • I will make losses if I don't act on it and miss on buying and sell opportunity basis this information.
  • There has to be patterns and connections between every news and my portfolio.
  • If I don't pay attention to short-term, then I am doing something wrong or I may look dumb.

This makes investors transact way too much, and that too with a sense of urgency or in panic. Any person with a little common sense can tell the side-effects of this.

Frequent churning, borrowing to make unwanted trades that leads to losses eventually, buying and not knowing what to do, high brokerage charges - are some of the detrimental things that happen to the portfolio as a result of the above myths.

In the digital era, each investor knows the price of all, but value of none.

In the digital era, what an investor needs to do is:

  • Firstly, need to acknowledge that they can fall in the trap where there is too much information.
  • Secondly, understand that it is as important to know what to ignore, as it is to understand what is relevant.
  • Third, thinking any inaction will lead to losses is an illusion. Many times, success in investing is all about not doing much but doing a few meaningful things.

While reading Malcolm Gladwell's David and Goliath: Underdogs, Misfits, and the Art of Battling Giants, I came across an interesting concept of law of diminishing returns when it comes to information. Some of us may have heard this concept before, especially while studying microeconomics. So here, he introduced something called as "inverted 'U' curve" to the readers, to highlight how too much information can produce below optimal investment returns.

To the left of the vertical dotted line, you can see that till a certain point, more information actually produces better investment returns. But as you can see, on the right of the vertical dotted line, after a certain point each additional piece of information yields less marginal utility.

Meaning after a certain point, any additional information will tend to decrease the effectiveness while increasing the risks.

This is called as the law of diminishing returns.

This makes me bring back to the original question - Has this digital evolution made us better in equity investing?

Digital empowerment allows us to harness the benefits of technology while making the process simpler and faster. However, when the information exceeds the optimal level, where we are not able to distinguish between relevant and irrelevant, then it is a problem area. And when any decisions, be it an investment, personal or professional, are not based on logic and empirical evidence, it will always prove to be a wrong action. After all, the whole purpose of information is to take informed decision, rather than wrong action.

As I talk to more and more investors, I have heard more cases of problems either because investors took too many actions or no action at all. I have not come across even one investing problem because an investor did not stay updated with all the breaking news.

Taking Informed Decisions In Times Of Information Overload

When we have over 400 news channels, one lakh publications, mobile news apps, stock ticker apps, WhatsApp groups and a lot more providing us with non-stop information, it is for us to decide when to say "Enough!" Deciding where to stop can be an arduous task. However, here are a few ways to take the right investment decision:

  • Focus on the facts
  • Exercise restrain & inculcate patience
  • Get expert advice
  • Focus on what really matters
  • Develop critical thinking skills

It is essential to base your decision on facts. However, if this looks difficult to you, don't be reluctant to take the help of an expert, who will help you remove biases from your decisions.

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