Budget 2020

Don’t react to every event: Paying attention to the wrong message can be detrimental to investments


The year of the Chinese virus has ended and it’s a cliche to say that the impact will be felt for a long time. However, there’s a problem: the compulsion among some analysts and some of the media to make dead certain pronouncements about the impact and the outcomes on an almost continuous basis. This started with Goldman Sachs’ confident estimate in the first week of February that the impact on global growth will only be a ‘modest hit to annual-average global GDP’ of 0.1% to 0.2%. They also said that unless there was a significant change in the circumstances, the impact of the virus would be limited to companies that are most exposed to China. Of course, they let themselves off the hook there with that ‘change in circumstances’ caveat but even in February, this amount of confidence was laughable.

Equally amusing is the routine addition of Covid data and vaccine news to the carousel of reasons that are trotted out to explain the daily moves of the stock markets. We now have business news anchors and headlines breathlessly explaining away large movements of the markets by something about mutant viruses or vaccine approvals or something of the sort. Needless to say, this is just as meaningless as earlier phases when anchors would end the day by yelling ‘Europe’, or ‘tapering’ or some other special of the day.

Unfortunately, it all feeds into the tendency that some of us have to try and connect news to investing. A good proportion of the modern, digitally-enabled stock investors watch the movements of their stocks continuously, eyes glued to a screen (TV or computer or phone) for any trigger on which they can act. They are focussed not just on the price, but also other bits of news about the company, the sector, the markets, the economy or indeed anything that the business channel anchors or their WhatsApp friends may decide is worth talking about on a given day. Covid has fitted in neatly into this style of investing, if investing is the word to use.

This is not a useful way of either making investments or monitoring them. There is such a thing as too much information and too much news, and it’s probably just as important to know what to ignore, as it is to know what to pay attention to. The reason is that the human mind has a huge tendency to see patterns and connections everywhere. We like to see patterns not because they actually exist, but because we believe that they have predictive value. If we believe that stocks fell on ‘covid fears’, then the utility of that is if the next time the said ‘covid fears’ loom, it could trigger us to act in a certain way.

“There is such a thing as too much information and too much news, and it’s probably just as important to know what to ignore, as it is to know what to pay attention to.”

— Dhirendra Kumar

It’s clear not just anecdotally but from transaction data as well that people transact too much. The ease with which news and information comes in, makes itself look important, and then induces us to act makes us do things that a little careful thought would prevent. There is no need to wait, and there is a constant sense of urgency. The unsaid story here is an implicit belief that opportunities come in a short and constant supply. If you don’t exploit everything that looks like an opportunity–or which other people say is an opportunity–then you might run out of opportunities.

Nothing could be further from the truth. The fact that covid caught all of us unawares does not mean that we must react to everything. Rather, it means that there will be many things that will catch us unawares. The idea is to be configured in such a way that the impact is only minimal.

A wrong action is far more damaging than a missed opportunity. There will be more, many more, in the future. The message of this connected, hyper-sensitive time is that events matter immediately to investors and if you, as an investor, don’t pay attention to them then you are doing it wrong. This is wrong.

(The writer is CEO, Value Research)





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