Your bias influences how you view a story. Take Newsmax (NMAX -2.44%), for example.
If you want to spin the cable-news company's stock performance in a negative light, you could focus on the fact that Newsmax shares are more than 90% below the high set earlier this year. On the other hand, if you prefer to view Newsmax in a positive light, you could emphasize that the stock is up more than 60% year to date.
Both perspectives are correct, but neither provides the full story on its own. There's an important investing lesson to be learned from this, and Newsmax provides a great case study.
Check your emotions -- and biases -- at the door
Warren Buffett probably knows as much about investing as any person on the planet. He's one of the most successful investors ever. Berkshire Hathaway delivered an average annual gain of 19.9% between 1965 and 2024 under his leadership, nearly doubling the average annual return of the S&P 500 (^GSPC 0.55%).
At Berkshire's annual shareholder meeting last month, Buffett said, "I know people have emotions, but you've got to check them at the door when you invest." He was exactly right, and I think we can extend the legendary investor's statement to include biases. If I could tell all investors one thing about Newsmax stock, however, it would be to check your biases at the door before investing.
I'm not just referring to political biases, even though it's important to check those at the door. You can like Newsmax's political leaning, but that doesn't necessarily make it a great stock to buy. Political bias can be a type of "confirmation" bias, where a person believes information that confirms existing beliefs but dismisses information that contradicts those beliefs.
Another bias to watch out for is "recency" bias. This is when a person places too much emphasis on recent information when making a decision. Don't let Newsmax's stock performance over the last few weeks unduly influence your overall evaluation of the stock. It's important to look at the big picture.
Image source: Getty Images.
Removing the bias from buying
Below, I'll examine how biases could cause problems in making a smart decision about buying Newsmax stock. For example, Newsmax announced last week that its stock will be added to the Russell 2000 index on June 30, 2025, which is a positive development. Some investors might conclude that buying Newsmax is a smart move, based on its inclusion in the Russell 2000.
However, buying Newsmax stock only because it's being added to a major index could be an unwise move. This is an example of recency bias -- overemphasizing recent news without considering the rest of the story.
Some investors could also note correctly that Newsmax's viewership soared 50% year over year in the first quarter of 2025 to an all-time high of 33.6 million. If you were looking for good news to justify buying the stock, that would seem to fit the bill. Again, though, taking this approach would be an example of confirmation bias.
Here's an important question to ask in light of this strong viewership growth: Is the increase in viewers translating to revenue and profits? Newsmax's revenue did grow in Q1, but by only 11.6% year over year.
The company's bottom line improved significantly, but Newsmax still posted a net loss of $17.2 million. Failing to check your emotions and biases at the door could have caused you to overlook key information about the company.
Using the "WRAP" approach
Authors Chip and Dan Heath outlined a great approach to making smart decisions in their 2013 book, Decisive: How to Make Better Choices in Life and Work. They used the "WRAP" acronym for this approach:
- Widen your options
- Reality-test your assumptions
- Attain distance before deciding
- Prepare to be wrong
These four steps can help investors minimize their biases before buying a stock. For example, widening your options could include adding more stocks to evaluate. If you're thinking about buying Newsmax, look at other stocks, as well.
Reality-testing your assumptions could involve digging into Newsmax's financial statements to see if the excitement about the stock seems to be justified. Attaining distance before deciding could translate to waiting a few weeks before buying or reading analysts' opinions about the company. Preparing to be wrong could cause you to invest only a small amount in Newsmax if you decide to buy the stock to limit your downside risk.
Note that none of this has anything to do with what you think about Newsmax's cable news network. What matters is whether or not the stock can make you money over the long term. To borrow a phrase from conservative commentator Ben Shapiro, "Facts don't care about your feelings."
