AN APPLE A DAY
Below is a nice graph of Apple from The end of 2011 till October, 2012. It shows a nice healthy growth curve... the kind that investors drool over. Sure, there's a period of drop and stagnation, but it's nothing drastic and is overcome shortly thereafter.
Of course, such historic curves are not how people experience the emotional roller-coaster of investing.
ONE DAY AT A TIME
So what does stock performance look like in a more real-time experienced way?
Below is a graph of the daily changes in Apple's stock during the same period:
Looking at the information at only a daily scale creates a much more volatile looking stock when compared to the nice, smooth, ride that looking at closing price over time tells you. It's quite difficult to get a sense of whether the stock is doing well or not (of course, we know it's Apple, and we know they did well), but attempting to sum the "up" and "down" bars to get a sense of it's total performance is quite challenging.
A MONTHLY VIEW
Now imagine if we only looked at the data each month:
This is much more manageable from a signal to noise perspective. It's much more clear that the stock is most likely doing well. There are 6 "up" bars and 3 "down" bars in the period, but the sum of the up bars and the down bars is almost certainly positive.
Finally, here'sa single 9 month data point.
MORE SLICES DOES NOT MAKE MORE PIZZA
In all three cases, the sum of the gains and losses, whether daily, monthly or once, is 252.86, which represents the total gain in Apple stock during that time period.
If I have a 24" pizza and 8 hungry people, how do I feed them all? Well... I slice the pizza into multiples of 8, either 8 larger slices or 16 smaller slices. If people count the number of slices they want and the information is experienced in slices received, 16 is far better than 8. I could also not slice the pizza and let people take what they need. I could cut the pizza into 100 tiny little pieces. All of those methods will result in a different interpretation of how much pizza there is (1 slice vs. 2, lots of tiny "bites" or a giant free-for-all). However, none of this does anything to change the amount of pizza.
If you track a stock daily, or hourly, you also get lots of extra "information." Things such as Tim Cook's last speech or the FED's quantitative easing policy, distant wars, Foxconn suicides and so on. All of that news, its impact (real or imagined), and all other things are rolled up into that single data point on Oct 1st, 2012 representing a 252.86 point increase in the previous 9 month period. By the end of the 9 month period, Apple had a fantastic run, much of it attributed to the large number of products it sells at reasonably high margins. Gone from memory are the daily and hourly headlines that seemed to play such a huge role and be such vital pieces of information. Of course, I don't expect news analysts to say "yeah, Apple dropped 15 points in the last hour, but no one knows why, plus, what really matters is that they are going to sell a a lot of new iPads and Tim Cook's latest speech isn't really very important." That's not exactly a good story.
We are much more impacted by magnitude than frequency. What really stands out on that first chart is the 50 point gain and the 30 point loss. It's very easy to react to those individual events within a small time period. If I made an hourly chart, I believe the extremes would be even more pronounced (relative to the time scale). The monthly view smooths those things out and makes the ride much more moderate. The problem is that we have constant access to this information and we believe, and are told, that it makes us better decision makers; but this may not be the case.
DON'T THINK...ACT
I believe that our bias tends to be to over react to local events. Why? Because survival trumps understanding. If you see a lion coming it's most likely better to run than to try and work out the lion's disposition, it's intent and so on; even though running may mean you lose your meal for the day. Similarly, if you happen upon a large quantity of food, it's better to eat as much as you can immediately, rather than contemplate the dangers of being overweight or considering how you can spread the meal out over time.
Moderation and careful analysis of information is mostly applicable to modern problems. Also, abundance of choice is a somewhat new phenomenon. For most of human kind's existence, getting information was hard; choices were few. Thus, we have not developed the ability to deal with these new problems.
Even knowing the above, I find it impossible to resist looking at my own portfolio on my smart-phone many times a day. I've tried to resist and it is nearly impossible. Furthermore, no matter how much research in the field of decision making shows that more information does not lead to better decisions (i.e.people who trade actively with constant information do not beat long term trends or less frequent traders) I find it impossible to change my basic behavior.
Merry Christmas fellow humans...
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