I have a large family with many very different personalities. If I ask one how their day went I may get a shrug or a three-word answer. With another, I’d better have an hour for the detailed story I know is coming. Sometimes it is a challenge to manage the amount of information required to be a good parent. My wife is much better at listening to long stories, always nodding and smiling at the appropriate moments. I, on the other hand, tend to just want the facts. TMI (Too Much Information) as I am known to say quite often.
Is it possible to have too much information? About 20 years ago the information age kicked into high gear and it hasn’t always been for the better. It has certainly changed investing and I would like to warn investors of an area where I believe it has greatly increased risk.
It was not uncommon for our grandparents to have their entire portfolio concentrated in just a couple of stocks. In the days of brick and mortar companies, investors could see a lifetime of growth from a business that dominated its industry for decades. The time and resources to start up a new railroad for example, made it very difficult for new companies to compete. At the same time, information moved slowly, allowing companies with normal struggles to manage their problems often outside of public view.
Compare that to last year when a respected national restaurant chain with over 2,000 stores had a food poisoning event at a couple of its locations. Almost before the board could call a meeting, the news had spread and the stock fell like a rock. In another current example, a national retail chain is facing a massive public boycott that spread like wildfire through an internet campaign. Two months ago they were a strong brand. Today they are struggling to stay ahead of damage caused by all the internet attention. All it really takes now is a single social media comment, a bad review, or a viral video, and companies are at risk of a rapid stock collapse like at no time in history. I call this new risk, “Information risk.”
I recently posted a review of a restaurant that in just two weeks was read over 4,000 times. Keep in mind all those readers were actively looking for a place to eat. The power of the press, once held in the hands of a few, now lies dangerously in the hands of anyone with an internet connection, and that power must be respected by investors.
Because the internet spreads information at lightning speeds, I encourage investors to be very careful if they choose to buy individual stocks. Bad news, boycotts, rumors and scandals, all have the ability to spread instantly, creating a whole new level of risk our grandparents never had to deal with. If investors want to invest in individual stocks, they need to recognize that easy access to information is not always going to be a positive.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 1173 S. 250 W. Suite 505, St. George, UT 84770.
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