Not too long ago, investors had to scrap for information.
To get a company's annual report, you'd have to send in a written request or try to dig up a copy at the library. I'm old enough to remember going into a broker's office in Minneapolis to read the Value Line newsprints.
Today, the problem has inverted... We have terabytes of instantly accessible information pummeling our brains.
If you want to research a company, all the information is right there on the investor relations page of its website. You can sift through quarterly earnings releases, 10-Ks, fact sheets, and presentations. We're overrun with information.
Add in what you hear from the financial media, e-mails, Wall Street analysts, Twitter, and even co-workers with a hot tip... and it gets difficult to filter through it all to focus on information that is relevant.
The "information bias" is the tendency to value and incorporate information – even when it's useless.
As investors, all of us succumb to information bias. But you can learn to focus and spend your time on what's important...
How many times has a glance at a stock chart made you want to buy a stock based on its daily price movements? How many times has a stock fallen 5% after missing a quarterly earnings estimate, tempting you to rush for the exits?
Here's a recent example... In my options-selling newsletter Retirement Trader, we sell options on blue-chip stocks. Over the past couple years, we've sold options on garbage-collection firm Waste Management (WM) many times. It's a stock we love.
Waste Management is one of the most boring companies you'll ever find, so it's often overlooked. All it does is grow sales as the entire waste-removal industry expands, maintain its 25% market share, and return value to shareholders.
In Retirement Trader, we sell options on Waste Management when we think the stock trades around fair value. It's as simple as that.
As long as nothing changes about the outlook for the company – as long as people need to throw their trash away, as long as Ivy League graduates don't turn to the waste-removal industry looking to innovate, and as long as Waste Management buys back stock and pays a dividend – we don't care what else happens.
Other investors get caught up in details... For example, late last year, a Wall Street analyst downgraded Waste Management and cut its price target by 7.5%, which crashed its stock by nearly 6%.
The analyst claimed that inflation would cut into profits. And sure, rising costs could result in a couple of weaker quarters.
But does that change our long-term view on Waste Management?
Absolutely not. The industry is still growing, nobody is challenging Waste Management's market share, the dividend is in no danger, and the stock is trading for a fair price.
We took the sell-off as a short-term buying opportunity instead.
The best advice we can give investors is to ignore the noise. A lot of useless information is floating around the web and on TV... information that could steer your investments in the wrong direction.
In daily life, the problem is much the same. We get pummeled with every daily tragedy, every political development, and every new minor medical study telling us to change all of our daily habits.
Resolve to let it all slow down.
Here's how you can fight against your brain's desire to act on new information...
Any time you buy a stock, write down exactly why you bought it. Write it on a notecard or save it on your computer. Maybe you're buying because of a powerful brand, a world-class dividend, or because a company generates a ridiculous amount of free cash from its sales.
Then, if you're ever tempted to sell, go back to that notecard. See if the reason you initially bought has changed. If it has, then go ahead and exit that position. If it hasn't, then stick with the investment.
The best investors have a long-term mindset. So do yourself a favor and ignore the daily noise...
Once you do this, you'll not only become a better investor – as you'll hold on to great companies for longer – but you'll feel a sense of relief. You won't have to stare at a stock chart all day. You won't have to read every single e-mail that mentions the stocks you own.
You'll only need to go back to your notecard once a quarter and make sure your thesis is still intact.
The information we consume becomes our thoughts. And what we consume is a choice... so make it a conscious and careful one.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor's note: Doc says it's time to forget the news... because it's easier than ever today to set yourself up for fat income streams that could pay you for life (and keep growing). We're finally in the perfect environment for his No. 1 strategy. It's a lower-risk way to set yourself up for a series of cash yields as high as 29% – without using options or anything complicated.
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"It's never too late to make some changes to how you perceive your money," Doc writes. Studies have shown that your ideas about money might matter more than you think. They can even determine how you save, spend, and invest... Learn more here.
Interest rates are up today. But over the long term, interest rates trend in one direction – down. And when short-term spikes occur, most folks don't see the lucrative side – that these are opportunities to collect more income from cash... Get the full story here.