>>Why too much information can negatively influence our decisions<<
"Introduction: Information Revolution"
Today we live in a time where it is possible to get almost any information imaginable in a few seconds with a touch of our smartphone. Whether it's the weather for tomorrow, the menu from our favorite restaurant, the route to our vacation spot, or Microsoft's stock price, any information is available quickly and at any time. Not so long ago, you would look at the weather report once a day in the daily newspaper or during the daily evening news broadcast. The menu from the restaurant was usually only available in the restaurant itself. For the way to the vacation the ADAC road atlas 1992 was bought and the route was put together laboriously by oneself. Thanks to the Internet and smartphones, we are now accustomed to receiving information constantly, everywhere and quickly. Today, we can acquire even complex knowledge in the comfort of our own homes in front of our PCs or smartphones, whereas in the past we had to go to the library and then look for the right books on the dusty shelves. We hold: Information is constantly and quickly available.
But not only the speed of acquiring information has changed rapidly in recent decades, but also the sheer amount of information. Every time we reach for our smartphone, we are literally overwhelmed with information: Weather, stock quotes, news, social media, new WhatsApp messages, etc. This wealth of information also reaches us at ever shorter intervals.
This new "information overload" is historically unique. Never before has there been such a rapid increase in information in such a short period of time. The Internet came to larger parts of the population about 30 years ago, and the smartphone in its current form has been around since the iPhone was unveiled in 2007, or about 15 years. Accordingly, in the last 30 years, and especially in the last 15 years, we have seen a kind of "revolution" in the way we get information. Moreover, for the first time in human history, anyone* in the world with a smartphone and Internet access can obtain information regardless of where they live or their social status (*censorship and Internet blocking are not considered here).
On the surface, of course, this development should be seen as very positive and offers plenty of opportunities. However, this "information revolution" -- precisely because it is so historic in the history of mankind -- is also associated with potential dangers and risks. This post is specifically about the potential risks of the information overload in investing.
"Is more always better?"
The popular belief is that with more information comes broader knowledge and, ideally, better insight. After all, these days we have the luxury of gathering all sorts of information and news on every security and using it to formulate our investment thesis. Investor A, who in the fifties or sixties still had to laboriously search for stock market prices and news about his investment from the daily newspaper or the stock exchange journal, was therefore worse and slower informed than Investor B in the nineties or early 2000s, when the Internet or television made stock market prices, news and ad hoc announcements quickly available. In today's smartphone era, Investor C ideally gets all this information directly via push message to his smartphone display - and that too in a fraction of a second and just a reach into his pocket away. In terms of mathematical game theory and "homo economicus" [1], it is therefore much easier for investor C to make correct investment decisions with a greater amount of fast information than for B and A. But is this really the case?
The problem with all this fast information is our ability to filter and process it. Most private investors follow a rather long-term strategy (for example buy & hold) and do not engage in day trading. So the investment horizon usually extends to several years. However, nowadays it is no longer the case that information about our investment reaches us at appropriate intervals and the more we deal with our investment, the more new information reaches us on a daily basis. This contradiction between a long investment horizon and a daily amount of new information causes uncertainty and subconsciously a constant re-evaluation of our investment in shorter and shorter time intervals. Thus, a buy & hold strategy quickly turns into a "buy & sell" strategy. According to a study by the NYSE, the average holding period of U.S. stocks has steadily declined since the 1960s: from an average of 8 years in the 1960s, to 2 years in the 1990s, to about 1 year in the 2010s, and to less than 6 months in 2020 [2]. This effect is of course also generated by lower order fees and a variety of high-volume trading platforms, but it is certainly a good indicator that a multitude of information often causes us to be uncertain about our investment.
As an exemplary and well-informed private investor, we would like to be very well informed about our investment. However, this now leads to the fact that we very often deal with new information about our investment and review our investment thesis. Finding a healthy middle ground between being informed and not being unsettled is a skill in dealing with information that we are taught almost nowhere. If we are convinced of our investment, we find hundreds of pieces of information that can convince us of our investment and make us blind to the critical aspects. This leads to the so-called confirmation bias (see also my article about stock market and psychology https://app.getquin.com/activity/YDHwRAosJH?lang=de&utm_source=sharing). If we are initially convinced of our investment, but then let ourselves be unsettled by the large amount of information, this is a different problem. The correct handling of a multitude of positive and negative information has to be learned and is a competence that one does not get as a human being in the cradle.
"Personal example: Apple"
As I already mentioned in my post about Apple (see https://app.getquin.com/activity/bqFUHUUxCo?lang=de&utm_source=sharing) mentioned, I was toying with the idea of buying Apple stock long before my first investment in Apple. In 2012, I first read up on the stock price and fundamentals. Then I looked at valuations and analysis. These produced a mixed picture: on the one hand, Apple was already making decent money at the time and iPhone sales were growing at double-digit rates. On the other hand, the "peak iPhone" theory was spread again and again and predicted that the iPhone boom is over and Apple will earn less money in the future. Correctly, it was also predicted that Android would become the dominant smartphone operating system by far. Apple's share price at the time, adjusted for split, was about $20 per share. Today, of course, a bargain. But you have to keep in mind that the share price had already increased tenfold since the iPhone was introduced in 2007, from about $2 to 2012. After all this information I decided not to invest.
I then made up for this only in 2017 at a price of 33$ per share. Since then, I have been confronted with similar information on an almost daily basis: Apple is making good money, Apple's revenues are growing well, Apple is too dependent on the iPhone, the iPhone peak has been reached, etc. This has exposed me to an information flood of positive and negative news about Apple since my 2017 investment. Fortunately, since then I have always been convinced that Apple will continue to make good money and have not been irritated. Since Apple shares were my first investment, I could not draw on a wealth of experience. However, with a bit of luck and possibly some good sense, I never seriously considered selling my shares.
This experience is especially valuable to me today, however, because I learned that you have to filter information to hold a stock for the long term and with conviction. I still look at information/news about Apple today, but also know how to better assess the information I receive on an almost daily basis. If Apple introduces a new iPhone, analysts are disappointed and it is predicted that it will sell poorly. The stock price pretty much always drops on the day of the unveiling. Nevertheless, I don't let this make me crazy and as it has turned out, this has been the right way to go. In the future, too, it will be necessary to gather and weigh the positive and negative information.
Sources:
[1] Wikipedia: https://de.wikipedia.org/wiki/Homo_oeconomicus
[2] Topforeignstocks: https://topforeignstocks.com/2020/08/04/average-holding-period-for-u-s-stocks-is-just-5-1-2-months-in-2020/
