Many thanks to Andrew at Humble Money for pointing me to a very astute blog entry from Teresa Lo back in November last year. When stocks fall sharply, a lot of people start thinking about picking up bargains: "it’s human nature to do this," says Lo, "because we perceive prices on a relative basis, relative to what it has been in the recent past".
But such temptation should be resisted, at least by buy-and-hold investors. Here’s Lo’s advice, which I’d tell every retail investor to print out in all caps and read every time they’re thinking of making a trade:
Investing tends to work best long after the story has left the front page.
The overwhelming majority of good investments, including good value investments, are made in largely-ignored companies in forgotten-about industries. If a sector like financials is all over the news, avoid it, and wait for the smoke to clear and the caravan to move on.
Justin Fox says, tongue only partly in cheek, that "not enough Americans read the business/financial media". He’s right, but he’s also wrong: for every individual who would benefit from reading the business pages more, there’s another individual who would benefit from reading the business pages less. Reading the news makes us think that we know more than we do, and it also makes us concentrate on the most volatile (and therefore newsworthy) asset classes.
I wonder if anybody’s tried using Nexis results as a contrary indicator: when a company or sector is being unusually ignored by the press, maybe that’s as good a time as any to take a serious look.