Overview – Bad Investment News Is Sometimes the Most Valuable
Very few people react well to bad news. The unpleasant information we hear can range from very minor, causing us to be agitated for a while, to absolutely devastating, which could significantly impact our daily lives. Given the generally negative reception such information receives, it comes as no surprise that most people try to avoid listening to bad news whenever possible.
Despite the pain, discomfort, and agitation that comes with hearing bad news, sometimes this is the information people need to hear no matter what.
Nobody wants to hear that they’re pre-diabetic, but this could be the spark they need to turn their lifestyle around before it’s too late. No CEO wants to hear that certain business divisions are failing, but it’s important to know of this as soon as possible to cut losses early.
When it comes to investing, the same observation can be made. Very few investors take kindly to bad investment news, but there will be times throughout their careers when this information proves to be invaluable.
Instead of trying to ignore bad investment news, investors may instead want to face it head-on and accept it, no matter how unpleasant it may sound.
Bad Investment News Can Help Investors Avoid Potential Disasters
When analyzing prospective investment opportunities, it’s very easy to focus solely on good news/favourable information – for the most part, this is understandable. After all, the point behind analysis is to gauge a prospect’s investment merit, and to do that investors primarily look at areas of strength such as strong earnings history, positive industry outlook, and robust qualitative factors.
Problems start to arise when investors develop a bias towards favourable information while conveniently filtering out any sort of bad investment news.
However, bad investment news is arguably more important than good investment news because this information is what could save investors from walking into a potential catastrophe. In a way, bad investment news also contributes to an investor’s assessment of investment merit.
Most investors are quick to focus on strong financial performance but are just as quick to skip over news regarding ongoing litigation, an increasingly difficult business environment, or signs of business weakness. While tempting to ignore, this information could expose potential red flags in a prospective investment.
No investor is eager to hear bad investment news, but there will be times when this is the information that investors must be privy to no matter what.
When Inundated With Good News, Be Careful
Every day, publicly traded companies all around the world compete to secure as much investment capital as they possibly can. To achieve this, they showcase as many positive facets, strengths, and other advantages that their company offers to try and convince as many investors as possible to park their capital with them.
Now, there’s nothing inherently wrong with sharing good news to try and attract investment capital. After all, companies must know how to effectively sell themselves if they want any hope of securing an abundance of capital.
With that being said, investors may want to get their guard up if they feel that prospective companies they wish to invest in are flooding them with nothing but good news.
When going through an annual report, specifically the CEO’s message and the Management Discussion & Analysis (MD&A) section, company leadership does their best to highlight areas of strength, but they also discuss areas of weakness and the management team’s plan to deal with them.
If the CEO and senior leadership only mention bad investment news in passing or omit talking about it entirely, then investors have strong reason to believe that company management is trying to hide something they don’t want them to know.
We’ve discussed financial dishonesty before, and how some companies try their best to cover up any weakness by being creative with how they present their numbers.
Trying to inundate investors with good news is largely rooted with the same goal in mind: to get investors to overlook, or better yet, ignore legitimate areas of weakness in a desperate attempt to obtain capital.
Informed Investment Decisions Require Both Good and Bad Investment News
Whenever you make any sort of major decision in your life, you likely consider both the strengths and weaknesses of the proposition before making a final choice. Placing too much emphasis on one of these areas almost always leads to a poor decision being made. Making investment decisions is no different.
As we discussed earlier, some investors develop a tendency to focus solely on news and information they like to hear. Because of this, they run the risk of making highly flawed decisions.
Every investment prospect, no matter how strong they are, will always have risk factors and other areas of weakness. An investor’s job is to understand these points of vulnerability and determine if these can be tolerated and/or contained – if not, then it’s time to look elsewhere.
Taking into account both good and bad investment news ensures investors have a balanced, impartial view of the prospects they wish to pursue, minimizing the chances they do something they’ll later deeply regret.
If You Can’t Handle Bad Investment News, You’re Not Yet Ready to Invest
It’s easy to say “Learn to accept bad news” but for some people, this is much easier said than done. Some people respond to bad news very poorly, and because of this, they react to this information emotionally. The inability to rationally accept and dissect bad news is a recipe for disaster.
Investors don’t need to be perfectly stoic in the face of bad investment news: an emotional response is understandable, but only as an initial reaction. Eventually, the emotions must subside and the bad news must be looked at through a logical lens.
If soon-to-be investors find themselves struggling to calmly react to bad investment news, then perhaps it’s in their best interest to postpone their careers to develop their emotional intelligence a bit more.
Again, to make the best decision possible investors must account for both good and bad news, but they must look at this information impartially and logically. The inability to do so will quickly prove to be a liability.
Wrapping Up
Investors are quick to perk up their ears whenever they catch wind of good news but are just as quick to gloss over, or outright ignore, news they don’t want to hear. Though comforting in the short term, choosing to ignore bad investment news can prove to be very costly.
By learning to accept and rationally understand bad investment news, investors can save themselves from walking into a potential trap, sparing them precious time, energy, and money in the process. In a way, bad investment news affects investment merit as much as good news does.
Just like any other decision, an informed investment decision takes both favourable and unfavourable information into account, without prejudice or bias for either one. If investors-to-be find themselves unable to rationally accept and analyze bad investment news, then perhaps it’s not yet time for them to start their careers.
