The stock market is constantly shifting and developing. It seems sense that many investors would be enticed to follow the most recent developments in an effort to remain ahead of the curve. But for most investors, this might be a risky strategy. In this post, we’ll examine the reasons why following the news is a poor stock-picking technique and provide several substitute methods that may produce better financial results.
News That Is Not Complete or Truthful
The fact that following the news frequently presents an inaccurate or even partial view of a scenario is one of the main problems with it. Often, news reports just present the visible portion of the situation. The market’s reaction might be drastically changed by later events and new data.
Imagine the following scenario: a business unveils a ground-breaking new product, and the announcement causes its stock to surge. What the original news item could have missed, though, is the industry’s intense competitiveness, the company’s financial standing, and any potential regulatory obstacles. Those that invest without doing their research and fall for the hype might end up with a stock that performs poorly in the end.
Efficiency of the Market
The notion of market efficiency serves as yet another compelling argument against following the news. This basically indicates that all accessible information, even the most recent news, is already reflected in stock prices. Profiting on news-driven price changes is difficult in an efficient market since the information has already been incorporated into the stock price.
When investors try to follow the news, they frequently end up purchasing at premium prices because they believe they are seizing the chance early on. But they could soon find that little space remains for additional appreciation because the market has already factored in the expected gains. Frustration and unsatisfactory returns may result from this.
Investing with Emotions
Chasing the news might lead to emotional investment, which is perhaps the biggest risk. You expose yourself to the emotional volatility of the market when you base your financial decisions on news stories and headlines. Irrational and impulsive actions might be motivated by fear or greed.
Assume you buy shares in a corporation after reading a favourable news article, and the stock drops when a bad report surfaces soon after. In order to minimise losses, you could sell your shares quickly if panic sets in. Though short-term swings are a normal part of the market’s ebb and flow, you may have held onto your investment with confidence if you had done your homework and grasped the company’s fundamentals.
Fundamental Analysis as an Alternative
A more responsible method of choosing stocks is to use fundamental research rather than following the headlines. Investigating a company’s fundamental financial elements, such as its earnings, revenue, debt levels, and management group, is required for this. Regardless of what the press says, you can determine which stocks are overpriced or undervalued by doing in-depth research.
Real-World Illustrations
Let’s look at two real-world instances to highlight the dangers of following the news:
- In 2020, Reliance Industries (RIL)
Reliance Industries’ stock shot up more than 50% on the announcement of a large investment in sustainable energy. Positive coverage of the announcement caused a frenzy among investors, who hurried to purchase RIL stock, viewing the investment as a pledge to sustainability. Still, when more details emerged, the demonstration finally faded. When RIL was at its highest, many investors lost money.
- In 2021, Paytm (PAYTM)
Following its first public offering, Paytm’s stock price fell by almost 70% (IPO). The announcement that the company’s finances were worse than expected set off this downturn. It’s important to remember, though, that Paytm is still expanding and has a big potential market. It’s possible that the sell-off was an overreaction sparked by the news, costing investors who heedlessly followed the headlines large losses.
Advice on Choosing Stocks Sensibly
Here are some suggestions to keep in mind if you want to be a profitable investor and stay away from the traps of following the news:
- Research thoroughly:
Prior to purchasing any stocks, do a thorough investigation. Analyse the financial accounts of the firm, gauge the management team’s strength, and consider the industry prospects. - Make Long-Term Investments:
Although the stock market can be erratic in the near term, historical evidence shows that it tends to increase in the long run. As such, make long-term investments rather than letting daily swings affect you. - Spread Out Your Portfolio:
Don’t concentrate all of your investing funds in a single stock or category of assets. One way to reduce risk in your portfolio is to diversify it among different investments. - Consistently Rebalance Your Portfolio:
Make sure your portfolio is in line with your risk tolerance and investing objectives by reviewing and adjusting it from time to time when your investments increase or the market circumstances shift.
In conclusion, following the news might thrill investors momentarily, but for most, it’s a dangerous course of action. To make wise investing selections, instead put your attention on research, fundamental analysis, and a long-term outlook. You may raise your chances of success in the fast-paced world of stock market investing by adhering to these guidelines.
