Information overload creates opportunities

David MoonBlog

Although a commonly held belief is that Wall Street is rigged against the small, individual investor, in terms long-term investment performance, the opposite is true. Individual investors can take advantage of a cultural bias toward short-term thinking to improve their investment results, quite possibly outperforming the typical institutional investor. The key is knowing what to ignore and when to do nothing.

Thirty years ago, institutional investors had an advantage over individuals because they had greater access to information. By the late 1990s, the Internet had leveled the information playing field, eliminating the institutional benefit of access to information. The ability to evaluate information became more important than simply having access to it. The edge in today’s environment goes to the investor most able to decide what information to ignore, and then successfully ignore it. This is a skill in which individuals should have a natural edge over the professionals, if they only have the intestinal fortitude to stand out from the crowd.

A constant bombardment of Tweets, Apple news alerts, real news, fake news and SnapFace stories sends an overt signal that action is better than inaction. This creates a bias toward activity. Investors almost always feel compelled to do something. The media treat almost every piece of information as breaking news. The Fed has a meeting, Apple changes the shape of the iPhone 8, Uber interviews five CEO candidates or a dog finds its way home after being lost for eight years … all of these events, when treated as important, send a not-so-subtle signal that we should buy or sell something, even if there is no real benefit.

By itself, action does not constitute either progress or improvement. Clients and investors don’t always realize that a conscious and reasoned decision to do nothing is a decision. Fueled by the expectation of action, institutional investors often feel compelled to make recommendations or place trades simply to rationalize their fees. This creates an institutional bias toward higher portfolio turnover, higher expenses, higher taxes and a lower likelihood that clients retain attractive investments in their portfolios.

A certain small group of institutions may have a speed advantage that comes from super computers that can place trades within split seconds of identifying mispriced securities, providing an advantage to the institutions with the best algorithms and fastest trading capacity. Most individual investors, however, are not trying to make two pennies per share on thousands of trades. Long-term investors can, and should, completely ignore micro-second price moves, instead focusing on longer term fundamentals.

Being active is different than being productive. Investors can gain advantage by turning off television, investment news Twitter accounts and Facebook. As Herb Stein correctly noted, “ a wealth of information creates a poverty of attention.

David Moon is president of Moon Capital Management. This piece originally appeared in the USA TODAY NETWORK.