Re­cent news isn’t al­ways rel­e­vant news

We con­sider the con­cept of re­cency bias and why in­vestors shouldn’t get caught up in the lat­est news cy­cle when they pick stocks.

Finweek English Edition - - MARKETPLACE - Editorial@fin­week.co.za

tihe n 5 May is­sue, I wrote about some of the many cog­ni­tive bi­ases that af­fect in­vestors’ de­ci­sion-mak­ing pro­cesses. This week I would like to delve into re­cency bias – whereby in­vestors are heav­ily in­flu­enced by re­cent re­sults or ex­pe­ri­ence.

Last week I was go­ing to be a guest on a lo­cal TV show to dis­cuss global in­vest­ing. So, be­fore I went on air, I asked peo­ple via Twit­ter what they con­sid­ered to be their favourite off­shore share. The over­whelm­ing an­swer was Tesla, fol­lowed by Ama­zon.

Noth­ing wrong with that on the sur­face, but here’s the thing: al­most ex­actly a year ago I was on the same show and asked the same ques­tion. Yet last year the an­swer was over­whelm­ingly Ap­ple. This time around, no­body men­tioned Ap­ple. And last year no­body men­tioned Tesla or Ama­zon. So what has hap­pened in the last year?

In truth, we have seen re­cent news on all three of the stocks. Ap­ple just re­ported its first quar­terly de­cline in iPhone sales. [This ar­ti­cle was writ­ten be­fore it was an­nounced that Berk­shire Hath­away bought a $1bn stake in Ap­ple in the first quar­ter of 2016.] Tesla just sold al­most 400 000 of its new Model S cars, which re­quire a de­posit of $1 000, with de­liv­ery only start­ing in late 2017 (if ev­ery­thing goes well for the com­pany). Mean­while, Ama­zon just hit a new all-time high, clear­ing the $700 level for the share.

So in all cases there is news on the stocks, but is this just short-term news or real, big­pic­ture, long-term and game-chang­ing?

In other words, this serves as a clas­sic ex­am­ple of po­ten­tial re­cency bias. We’re not look­ing at the big pic­ture; we’re fo­cus­ing on what we’ve just heard in the me­dia, on Twit­ter and the like. Sim­ply put, the fo­cus is on the hot new fad. Now fads are just that – some­thing that’s hot now, but might not even ex­ist in the next week or three.

But in­vest­ing is long-term, so we’re mix­ing our time­frames.

As an in­vestor you only ever re­ally need a long-term view, and an un­der­stand­ing of the stocks you in­vest in and the ar­eas they op­er­ate in. But, as im­por­tantly, you need to ig­nore the short-term fads. The big­gest ex­am­ple of a short-term fad was the dot-com boom of the late 1990s and we all know how that ended – in tears. Let’s con­sider Tesla, Ama­zon and Ap­ple. Tesla is an amaz­ing com­pany and it now prom­ises to de­liver 500 000 cars in 2018 – two years ahead of sched­ule and up ten­fold from the 50 000 it de­liv­ered this year.

In other words, it wants to be the great­est engi­neer­ing com­pany ever; a great am­bi­tion, but a mas­sive risk. Thus far, Tesla has done a lot right, but man­u­fac­tur­ing this num­ber of cars is some­thing it hasn’t yet at­tempted. The risks here are very real. But this isn’t re­ally new news; sure, the re­sponse to the Model S was un­ex­pected, but that adds more risk than re­ward for now.

Ama­zon reach­ing a new, all-time high is great. But for an in­vestor, this is to­tally mean­ing­less. Yes, it is nice to see your stocks at highs, but that’s never a rea­son to

As an in­vestor you only ever re­ally need a long-term view, and an un­der­stand­ing of the stocks you in­vest in and the ar­eas they op­er­ate in. But, as im­por­tantly, you need to ig­nore the short-term fads.

be a buyer.

As for Ap­ple: sure, iPhone sales slipped and the com­pany hasn’t had a mas­sive hit since the iPad. But it made over half a bil­lion US dol­lars in rev­enue ev­ery day of the quar­ter. Ap­ple has mas­sive brand qual­ity and very loyal users, who are locked into its ecosys­tem.

So I am not say­ing we must ig­nore new news, but we must add it into the in­vest­ment case for each stock and give it the weight wor­thy of its im­por­tance, rather than giv­ing it more weight sim­ply be­cause it is most re­cent.

Tesla prom­ises to de­liver 500 000 cars in 2018.

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