He who holds the information holds the power. This sentence has always been true and it becomes very sharp in the face of a world where there is no longer a lack of information but on the contrary - an excess of information
He who holds the information holds the power. This sentence has always been true and it becomes very sharp in the face of a world where there is no longer a lack of information, but the opposite - information surpluses in huge volumes and at crazy rates bombard us non-stop and make it difficult for us to distinguish the rest from the pulp and the truth from the lie. Investors must know when to react and when to ignore. What is important information and what is negligible information. They must analyze how reliable the information is and how much it can be trusted, if at all.
It is appropriate at this point to come with a word of warning: we must be careful with what is called "inside information", which is a criminal offense and means using information that has come to us illegally from people who are inside the companies themselves and who give us specific information they have in order to influence the share price. Clear examples of this are when we learn from someone from within the company that it has won a major tender or lost to the dismay of a major client and this news can have consequences for the stock price and the market is still unaware of this information. At the same time, the use of general information in which, for example, a senior employee of the company analyzes before the investor its performance and evaluates its prospects in the future against its competitors, is information that can certainly be used.
In fact, the sophisticated investor should act similarly to the Israeli intelligence:
For Israeli intelligence, there are three main types of sources for obtaining information: Komint from the Communication language, which is the verbal traffic that passes through wireless and wired means of communication. Alinet from the word Electronic, which are the electronic transmissions transmitted by devices such as radars and computers, and Yumint from the word Human, which is the information transmitted by word of mouth from human sources. Another source of information for Israeli intelligence is "visible sources": scanning the daily press and the Internet of Arab countries.
Investors should actually work with the same method - financial intelligence. They need to absorb information from a large series of sources: Yomint - friends, acquaintances, professionals, Comint - television, radio, as well as from the visible sources - press, internet, books and more. Investors should compare this information against all the accumulated knowledge in their possession and their past experience. The information transmitted from different human sources is weighted according to the quality and reliability of the source. If the post office told us that he estimates that the chemistry industry is accelerating, we will not give it the same weight as an assessment that a senior chemist makes in our ears. The investor must perform an analysis of human resources according to their quality and reliability. Reliability analysis, on the other hand, will give a higher weight to the mail carrier, who knows that there is going to be a strike at the postal authority, compared to the chemist who heard it from a secondary source.
We all do this division into quality and reliability usually unconsciously, and weigh the information received, according to an internal quality and reliability rating that we have determined for ourselves, mainly based on past experience. However, here too there may be biases. Sometimes, human sources skew the information in the direction they want, to influence our decisions. For example, an acquaintance who excitedly informs us that he heard that the Bank of Israel is going to lower the interest rate soon. This, we know, should be good for the stock market. If he has convinced us, he may hope that we will pass this information on to other people we know, so that they will also purchase shares and pass the information on. He himself is invested in stocks up to his neck, and the entry of additional investors into the market will benefit him.
Allegedly, it is possible to underestimate the information transmitted by word of mouth, and especially rumors, as a source that affects the financial markets. But surprisingly, this has considerable effects and veteran players in the stock and forex markets are aware of these phenomena. More than that - it turns out that the speed of word-of-mouth transmission, according to a study done in the USA, can encompass entire countries within days (as long as it did not reach the media beforehand). Think for a moment, if you tell important information to everyone you know and they will pass this information on to everyone they know and so on - within how many days will the entire State of Israel know about it? two days?
The weight given to rumors transmitted by word of mouth, in periods of stress and nervousness in the markets, increases a step. These increase and intensify the nervousness and cause investors to take actions, which in normal times they would not have taken. The press also has a part in this, especially the information called "Scoop".
The press, by its very nature and out of the necessity to sell its products better, tends to "inflate" certain events and minimize or ignore other events. For example, the press creates a positive bias in the information regarding the probability of getting rich from speculative activity - how? The press, in search of spicy stories and heroes, highlights the get-rich-quick from speculative activities in the stock market or the foreign exchange market. These also often tend to advertise themselves. But how many times did speculators "who lost their pants" want to tell the press?
Furthermore, let's assume that the probability of getting rich in the stock market is the same as the probability of bankruptcy and is expressed through a normal statistical distribution. I mean, for every gainer there is a loser and for every new rich, there is a new bankrupt. Most investors of course move around an average of small gains or losses.
Small profits or losses, there is no news in them. Heavy losses, usually stubbornly hidden by those who suffered them. On the other hand, the big earners often tend to be proud and receive reactions of admiration from those around them. Hence, the information flowing to the public on these issues is strongly biased towards the probability of getting rich, while hiding or ignoring the probability of bankruptcy. From this rule it is also derived that people like George Soros are nothing more than a statistical probability - there will always be a few who "play it big". The conclusion from this is that the journalistic stories must be taken in proportion (most of us do this anyway).
In the current era, the Internet is, without any doubt, the richest and most challenging source of information. There is nothing like the Internet for obtaining information for a person sitting at home in front of a computer. Here, too, there is a need for specialization. The weakness of the Internet, from the point of view of the investor, is its strength: it transmits us excess information in enormous volumes and at crazy rates. Professionalization must come in the form of the ability to locate relevant information and filter only the important information. Probably the best way is to run the search engines such as "Google" and others. The advantage of search engines is the presentation of "related topics" or connections that can lead us to new information that we did not know about or to new ways of thinking. Considerable depths can be reached in the analysis of an industry in which a company whose stock interests us is located. The information is so broad that we are able to reach analyzes from around the world regarding the industry or sub-industry that interests us.
