Information Overload

More information does not necessarily mean more knowledge. The world of investing has changed over the last 28 years. When I opened my first brokerage account, information was sparse. Monthly account statements were received, but nothing else. No Internet, no CNBC, no day-traders, no Cramer, no minute-by-minute updates announcing the arcane and meaningless. And guess what? No problem.

Somewhere in the early to mid 1990s, things began to change. Technology — specifically the Internet — brought instant information to all. Personal computers opened the door to adventures previously unimagined in the world of investing — from listening in on quarterly corporate conference calls to day-trading from your home. The information superhighway arrived.

And has that wealth of information and data been useful and helpful to most? Are you kidding me? Do you have to ask?

No. In fact, just the opposite. While technology has opened the doors to an unlimited amount of information, the reality is simply this: Information does not equal knowledge, and knowledge most certainly does not equal wisdom.

The reality is, if anything, the technological information revolution has quite simply been hugely costly for investors in the aggregate. Here’s why: The information so instantly and widely available leads to the illusion of knowledge and control. An overconfidence of outcome. This tempts many investors to over-trade and take on more risk than they realize. Active traders tend to under-diversify holdings, chase trends (pouring into last year’s winners) and finally, trade to reduce regret, that is, selling winners and holding onto losers until they break even. (Pop quiz: What’s the difference between a speculator and an investor? An investor is a speculator waiting to break even.)

The cost of this online trading hyperactivity is high. Really high. It is estimated that on average, active online traders penalize themselves roughly 3.8 percent per year as compared to the returns offered by the general market. Now that may not seem like a big deal, but it is. If the long-term returns of common stocks going forward approach the historical 10 percent or so, a $100,000 portfolio should theoretically grow to $672,750 over the next 20 years. Reducing the portfolio’s return by the 3.8 percent per year penalty that active traders seem to impose on themselves reduces that figure to $333,035 — ouch!

If you want to play the fast money game, do it with your mad money. When it comes to your serious money, give yourself a break. To do well in the investment markets, you really don’t have to be very smart. You just can’t be stupid. Turn off the noise and tune out the distractions. Do thoughtful fundamental research on potential investment candidates, or find a qualified adviser that you trust to do the work for you.

There’s no denying that technology and the Internet have brought opportunities. But just because you can do something doesn’t mean that you should. The wonders and advantages offered by the informational and technological revolution of the last 20 years may seem amazing, but the truth for many is this: Having the ability to live out your “Master of the Universe” investment fantasy is often no more than an expensive game of gambling, fostered on the public by the razmataz of a brokerage industry that yet again is looking out for its best interest, not yours.

Bo Billeaud has been president and chief investment officer of a Lafayette-based money management firm for the past 18 years. Contact him at [email protected] .