WHETHER IT'S FROMtalking heads
In fact, as strange as it may seem research, inquiry and due diligence aren't always what they're cracked up to be. As with anything else in trading or life, there can be too much of a good thing.
When buying a stock, some people evaluate the economic fundamentals. Others check the charts. Some survey the "experts" or watch what the supposed "smart money" is doing.
As I've written before, once I've bought a stock I systematically avoid any news or research reports about the company. It's tempting to seek validation from others about our own positions, but I have found listening to anyone or anything besides the market itself to be a dangerous proposition. Unless you want to be constantly second-guessing your judgment, take your cues from the military: Don't ask and don't tell. Trading is tough enough as it is without a squadron of armchair critics squeaking in your ear.
For example, when I am foolish enough to tell colleagues that I bought some Sun Microsystemslast week, I get nothing but grief! Don't you know Jim Cramer is bearish on tech?> they ask me. Or that Abby Joseph Cohen is reducing her estimates on the S&P 500?> Don't I know that price/earnings ratios are still at astronomical levels,> or that Arch Crawford thinks that the Nasdaq will crash now that Saturn and Neptune are experiencing solar storms?>
Spare me!> Does a big-shot analyst know where Sun is going simply because he went to Wharton, has a closet full of Armani suits and drives an Audi TT? Absolutely not! Heeding the constant chatter of know-it-alls is a sure way to begin second-guessing your own ability. You won't just drive yourself broke...but crazy as well.
How can too much information be dangerous to your wealth? Simple: It can undermine your discipline. And whether you want to buy strength or weakness, follow the bulls or the bears, you need to have an investment discipline: Choose a style, and stick with it.
When a trade goes against you, your discipline comes under pressure. You start looking for arguments to support the understandable wish that you were right and the market is wrong. And with so much chatter out there, it's a sure thing that you'll eventually find someone who's saying what you want to hear someone who will help you convince yourself that your wishful thinking is really a strategy. The more analysis I read, the more tempted I am to stay in a position that should probably be dropped.
For example, say you buy XYZ at $50 because it crosses above a key moving average. When the chart breaks down and XYZ falls to $45, you decide to hold on because the weakness now makes the stock seem like a value play. The technical event that prompted you to buy XYZ in the first place has long been forgotten. You're now a fundamentalist who's holding a stock that, if you were adhering to your original discipline, you would already have sold for a small loss. When it falls to $40, you start getting panicked. But instead of selling out and taking your lumps, you discover thatGoldman
or some other of the big-time investment houses has a Strong Buy on XYZ, calling the stock a potential takeover candidate. So you again hold on, becausehey, Goldman likes it, and my gosh...they're professionals.>
First you were a technician and then a fundamentalist. Now you're simply asheep
At $30 a share, you are frantically searching the message boards for good news, and although you bought the stock some 20 points higher, you decide to hold on to XYZ based on the bullish insight of Techdude1039@yahoo.com, an anonymous poster who confidently proclaims "the bottom is in." At $20 a share, when the company finally issues a negative earnings report, you puke up your position for a 30-point loss.
That's the problem with too much information: It's a justification for sloppiness. You can't be a technician one day and a fundamentalist the next. That isn't disciplined; it's disastrous. So avoid the white noise...all of it. Because in the final analysis your portfolio is your responsibility. You will reap the benefits and the consequences. And when it's time to beat a retreat, don't hold on because Joe Battipaglia, your cousin, the charts or your ego say it can't go much lower. Because as we've all learned over the past 18 months, chances are it probably can.
Jonathan Hoenig is portfolio manager at Capitalistpig Asset Management, a Chicago-based hedge fund. At the time of writing, his fund was long or controlled shares of Sun Microsystems.>