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No news is good news

Posted on May 3, 2007 by Richard Beddard
Filed Under Investing, Markets |

Hal Varian, a professor at the University of California, explains how investors as a group do worse than the market. He quotes research from Ilia D Dichev of the University of Michigan, which shows:

An investor who bought a value-weighted portfolio of stocks in the New York Stock Exchange and American Stock Exchange in 1926 and held them until 2002 would have earned an average annual return of about 10 percent.

By contrast, an individual who bought in 1926 but moved his dollars in and out of the market in the same pattern as the average dollar invested in the market would have earned a return of only 8.6 percent a year.

For NASDAQ the discrepancy is greater. And it exists for 18 of the 19 of the World’s indexes.

Why? He says private investors tend to buy when they read or hear good news about a company, and sell when they read bad news. Sadly by the time they pick up their copy of Business Week the price has already moved, meaning they will buy at a higher price or sell at a lower price than their nimble-fingered professional counterparts. Buying higher and selling lower earns them a lower return.

Intuitively, I agree that reacting to news could reduce returns in this way. My ‘system‘ insulates me because I research shares and take decisions in strict order (alphabetical by sub-sector and then by name).

By way of example, there are 2416 UK shares in my watch list. That’s all of them, excluding investment trusts. The last share I reviewed was SCS Upholstery (this morning on the train into work). It’s number 1212 on the list. HMV, which I own and about which there only seems to be bad news at the moment, is number 2277. Despite the collapse in its price, I’m blissfully indifferent until next time I come to review it - probably in July.

There are many reasons I cycle through the market:

  1. I like to look, however briefly, at every share, and it would be impossible to keep track of them all unless I approached them systematically.
  2. I prefer to examine shares in the same sub-sector together so I can compare them.
  3. There are certain sectors that are easily forgotten, often the sectors with the most potential, by all but the most diligent investor.

A happy side effect, though, appears to be I avoid reacting on a whim to news, later to regret it.

Footnotes:

  1. I found the Professor Varian’s article on Economist’s view.
Category: Investing, Markets

Comments

4 Responses to “No news is good news”

  1. Sanjaykumar Gajare on May 4th, 2007 7:58 am

    Hi,

    I agree with you. Common investors become prey to sophisticated investors due lack of resources such as time , corpus, research reports etc. I am holding few shares which saw -30% and now few of then are in green by 10%. I think it is better to do fundamental analysis and buy the stocks for long term.

  2. Richard Beddard on May 4th, 2007 10:34 am

    Thanks Sanjay, and good luck with those shares now in the green :-)

  3. Tomas Carruthers on May 10th, 2007 10:36 am

    Richard:

    Hal Varian of Berkeley is an adviser to Eric Schmidt, the CEO of Google. I should have thought that GOOG has turned out to be the ultimate ‘buy-and-hold’ internet stock for retail investors … until the next one.

    TWC

  4. Richard Beddard on May 10th, 2007 10:49 am

    Hi Tomas,

    Thanks for comment :-) Indeed it has, though sadly I didn’t think so at the time of the flotation, despite the enthusiasm of some of the people around me!

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