This Will Make You a Dumber Investor

It's probably a Minnesota, Lake Wobegon-wanna-be humility thing, but I'm no fan of Twitter, the social networking microblog that lets users send each other 140-character messages on the fly. In an age of epic narcissism, where people already measure their worth by collecting Facebook "friends" and LinkedIn contacts like so many Alf pogs or Beanie Babies, I don't think we really need another avenue for mass navel-gazing. In fact, I think this trend could be harmful to your nest egg.

Here's my major malfunction
Over the past few weeks, as Twitter has become for many a must-have doo-dad, I'm detecting some disturbing trends in Twit finance that I think will lead you to make bad investing decisions. It came to a head for me this week when I noticed a SmartMoney article based on the premise that following its favorite dozen economic/market bloggers can help make you "make smarter money moves."

That's an unproven assertion, to put it kindly.

To put it more truthfully, it's absolute garbage.

When more and more quickly isn't better
Following Wall Street traders, stock pickers, and up-to-the-second news feeds is already a full-time job for some. Think you can analyze data faster than the trading desks at Goldman Sachs (NYSE: GS  ) , Morgan Stanley (NYSE: MS  ) , or hundreds of hedge funds, who have massive computer systems and special data pipes so they can stay ahead of the competition on the latest micro-movements in the market? No way.

Nor would following SmartMoney's advice to keep tabs on smart macro prognosticators like Roubini and Krugman have helped. Had you paid much attention to recent, rank economic news, you might have missed out on a big market rally that sent consumer-facing stocks like Home Depot (NYSE: HD  ) and Chipotle (NYSE: CMG  ) up 30% or more.

The fact is, Twitter can't make you nimbler than anyone else. And even if it could, it would be no guaranteed money maker. Remember, even if you knew everything first, you still wouldn't know which way the markets (or individual stocks) might move after that information. A single example: Logitech (Nasdaq: LOGI  ) recently reported a horrendous Q4, far worse than analysts guessed, yet the stock is up more than 15% since then. Had you known before the release what those numbers were, I'm sure you would have guessed (as I did) that the stock would have dropped like a rock. And despite having better than up-to-the-minute information, you would have been wrong. Had you loaded up on bearish options, you could be nicely toasted by now.

When more and more quickly is worse
More information, more quickly, is clearly not better, but it can't hurt, right?

Unfortunately, it can -- big time.

The problem centers on the way your brain relegates decision making to two separate systems (a scenario described in recent books such as Nassim Nicholas Taleb's Black Swan, Jonah Lehrer's How We Decide, and Jason Zweig's Your Money and Your Brain.) Briefly put, one part of your brain uses shortcuts, based on emotions and other fleeting stimuli, to come to conclusions quickly, often before you're even aware a decision has been made. The other decision-maker, which operates in a different part of the brain, is slower, more reasoned, and more balanced. Making things worse, decisions involving money (especially random ones, the kind generated by the stock market) are already shown to engage the emotional part of the brain, eliciting responses and behavior similar to addicts looking for a fix.

Alas, just when it matters most, you're most likely to route an important decision to the most fast-acting but ill-informed, brevity-worshipping part of your brain. I think I'll call it your Inner Twit.

And if you think you're too smart or self-aware to fall victim to your Inner Twit, think again. You don't get much of a choice about where to send these decisions.

There is hope
The surest way to avoid being tripped up by your Inner Twit is to make no snap investing decisions at all. Sleep on it. Put it on your to-do list for next week. And if you aren't going to act on the worthless, up-to-the-second noise craved by your Inner Twit, it's a safe bet that you can ignore it altogether. That's why I've been advising investors for years to ignore the ridiculous, rotating headlines on Yahoo! Finance, the seizure-inducing ticker-crawls on CNBC, and the frenzied hand-waving on stock message boards.

Twitter is only the latest, and most banal, extension of a culture that has a hard time recognizing the difference between information and knowledge, between timely and useful, between price and value. And make no mistake, your time is valuable. Any time you waste on Twits is time you could be spending on more important things: Read that latest proxy statement, call your spouse and say "hi," or throw a tennis ball for your dog.

One example
As co-advisor at Motley Fool Hidden Gems, information overload and a false sense of urgency are two of the biggest challenges I face. Sure, I like to stay up-to-date on what's happening to our holdings, yet I need to remain aware of how my Inner Twit twists the information I receive, and step back and breathe before making decisions. For instance, shortly after I recommended Autoliv (NYSE: ALV  ) to members, the company announced an equity and debt offering that sent shares plunging. Couple that with a constant stream of news about bankruptcies at big customers like Ford (NYSE: F  ) and General Motors (NYSE: GM  ) , and it had many people screaming for us to dump it. My Inner Twit was shouting the same thing. The last thing I needed was a greater supply of 140-word snippets about the state of the auto industry. So, I stepped back to think.

A more sober analysis convinced me that this was not a catastrophe. Only a few weeks later, this recommendation is now up 66% for us, nearly 50 percentage points better than the wider market. (Full disclosure: We've got our share of laggards, too.)

Foolish final thought
Most often, in investing, the last thing we need is more information. We have a hard enough time handling the flood we've already got. Step away from the Twitter and concentrate on what matters: the price you're paying for a stock, the business fundamentals, stewardship of capital, returns on investment.

Those are the issues we concentrate on at Hidden Gems, where we're allocating $250,000 to our best stock ideas. You can take a free trial to see all of our recommendations stock ideas and find out if our analysis and temperament match yours. Click here for more information.

Seth Jayson owns shares of Chipotle, but has no position in any other company mentioned here. You can find him on his Twitter feed (@foolseth), though it hasn't been used in over a year. Chipotle is both a Hidden Gems and a Rule Breakers pick. Autoliv and Logitech are also Hidden Gems selections. The Motley Fool has an ironclad disclosure policy.


Read/Post Comments (7) | Recommend This Article (36)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 04, 2009, at 4:58 PM, septa44 wrote:

    An article like this is common sense, in a way, but necessary to read again and again. The fundamentals of investing never changes even if the technology does. How can anyone make an informed decision from a technology that limits entries to 140 characters? Twitter will fade at some point (see http://www.twitterbacklash.com), but the time-tested rules of investing never does.

  • Report this Comment On May 04, 2009, at 6:13 PM, Peetzup wrote:

    "Inner Twit" is the best I've heard or read in a long time. I can't say it without laughing. Maybe you're channeling Peter Ustinov. More, please.

  • Report this Comment On May 04, 2009, at 6:25 PM, dvillone1 wrote:

    Ya know, the more I read about you guys the less I like. Ford has not filed bankruptcy. For that matter, even though it has been talked about a lot at GM, they have not as of yet. Yes, Chrysler has. Get your information straight before you decide to be a writer for an investment news letter company or whatever you idiots call yourselves. I am not into this bunch of fools anymore. This is my second major problem with you guys in a week and I will not be subscribing anymore. By the way, the last guy who wrote for you on some items got bashed big time by almost all of the comments due to his lack of true knowledge; somewhat like this guy.

  • Report this Comment On May 04, 2009, at 6:30 PM, jc09058 wrote:

    I spent about 10 minutes reading this article. Way longer than usual. Why because I was laughing so hard I almost fell out of my seat.

    Using a quaint term, it's a case of TMFI at work. Too often more information only slows things down even worse which leads you to thinking you need to speed things up again, vicious circle.

    Going with the hard proven methods work the best and leave the 'bling' and blinking lights for those that need it. If nothing else, they will be so hypnotized that they will stay out of my way as I score great deals as they drool on their keyboards.

    Still laughing and chuckling. Loved it.

  • Report this Comment On May 04, 2009, at 9:30 PM, Ibeatmykids wrote:

    dvillone,

    You aren't supposed to do exactly what these articles say, they are just analysis, ideas and opinions. Don't blame MF becasue you made a losing move. If it were as easy as reading an article and making money, I think we would all be rich.

    I like this article too. I have made the mistake of being too hasty before like everyone else.

  • Report this Comment On May 05, 2009, at 7:55 AM, TMFBent wrote:

    DV, no one said Ford was bankrupt. There's been a constant stream of news about potential bankruptcies at every carmaker for months now, and that's been the issue.

  • Report this Comment On May 11, 2009, at 11:21 PM, Clint35 wrote:

    Seth you're absolutely right. We have way too much information in our modern world. Most of it is useless and pointless. That's especially true when it comes to investing. Most so-called experts only concentrate on what's going on this week and what might happen next week. When any of them try to talk long-term they end up talking six months or a year from now. And their idea of a good company is one that everybody has already heard of and the price has gone up a lot. Great article.

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