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Are You Ignoring This Huge Risk to Your Investments?

“Investors lose over Rs 2 lakh crore in two days over economic slowdown” shouted a leading business daily on August 19th.

The BSE-Sensex had plunged almost 700 points over the previous two days. That was not a small drop. It amounted to a 4.2% decline in the index.

Yet few headlines reminded investors that the Sensex was still up 98% (excluding dividends) from the market lows 2 ½ years ago.

But ‘2 lakh crore’ was made out to be a sensational figure, at least the way the headline was framed.

Of course the past few weeks have been very volatile for stock markets. But what is interesting is that this has led millions of investors to completely reverse their view on the future of equities.

From ‘all is well’ in July 2011, we heard voices of ‘all is in the well’ in August, and people are again talking about ‘all is well’ as of now.

It happens all the time.

The story is as old as equities themselves. When the market is an uptrend, headlines focus on opportunities that suggest investors to throw risk out the window. And when the market is in doldrums, they focus on risk and forget to tell people about the opportunity.

This is the very opposite of what headlines – and investors – should be doing.

This is what we call the ‘headline risk’, which most of us fail to incorporate in the way we invest in stock markets.

It is generally defined as the possibility a negative news story will spread to other media outlets and cause a significant change in the value of an investment.

For instance, an unconfirmed report of a corporate management shakeup might be picked up by competing newspapers and television networks, thus causing a sharp decline in the company’s stock price. The firm’s stock price is likely to be subject to substantial volatility even though the story eventually proves false.

Given the spread of business media, and across many forms – print, television, online, mobile – the ‘headline risk’ has seen a sharp rise over the past few years.

Most often, the headlines blow the news beyond proportions and that causes grave losses to the stock markets, and ultimately to the investors.

The losses are magnified when investors react or panic after reading a headline, even if it ultimately is just a rumour that turns out to be false.

But headlines can do severe damage to an investor’s portfolio, as I’ve seen in so many cases in the past.

There have been otherwise sharp, wise investors selling their stocks just because they read a headline story in a newspaper, and failed to do a cross-check whether the story was right.

See, it’s easy to fall prey to ‘headline risk’, and it’s equally easy to avoid it.

How to avoid ‘headline risk’?
We read in a recent post why the goal of business media is not to make you money but to sell advertising.

The media needs sensationalism to grab your attention. They aren’t interested in helping you reach your financial goals. Instead, all they are interested in doing is helping their sales departments sell advertising. This is what sensationalism helps them to do.

If you can understand this, you can protect yourself against the ‘headline risk’ that can hurt your portfolio beyond your imagination.

See this headline – “Indian stocks markets drop by 700 points in two days”.

Compare this with – “Investors lose Rs 2 lakh crore in two day as stock markets melt”.

Which one is more sensational of these two headlines? Which one steers your emotions more? Which one is more frightening?

Or see these cover pages (August 1979 and October 2008 respectively) of the leading international business magazine ‘Business Week’.

You see, scary headlines – like the second headline above and the two Business Week covers – create strong emotions. But strong emotions usually lead you to bad investment decisions.

It absolutely irritates me that business media use such kind of sensationalist headline to drag people in to describe something in sometimes blown-out and mostly inaccurate ways.

When they call the ‘death of equities’, where do they want you to invest? Into government bonds yielding 6-7% and not enough to cover inflation? Into gold that doesn’t have any intrinsic value of its own and has already risen several-fold in the past 10 years? Into real estate which is mired in a sea of corruption?

You see, your best bet as a long term investor lies in high quality stocks that can help you meet your long-term financial goals.

Scary and sensational headlines try to lead you to emotionally incorrect decisions that act as deterrents to you achieving these goals.

The truth is your greatest risk as an investor is not that stock markets rise and fall in the short term or that they are a risky place to be in.

Your greatest risk is that your money fails to keep up with inflation. And to cover this risk, stocks are your best bet in the long run.

Consider this before sensational headlines prompt you to do something foolish.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

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