How do I understand and interpret stocks

Read, interpret and understand business news correctly

The past few weeks have shown us once again how important it is to keep calm and a cool head in turbulent phases on the stock market. We live in a time when it is incredibly important to filter which messages are actually important and which are not. Thousands of messages hit us every day through a wide variety of channels, be it via Twitter, Facebook, websites, newsletters or television. In phases of uncertainty, the amount multiplies again.

Above all, however, the qualitative assessment has become more difficult due to the unfiltered amount of news. In times of click rates as a measure instead of content quality, headings are dramatized and exaggerated representations are chosen to lure readers. Blogs and social media channels advance opinion leaders who often do poor research or who simply lack specialist knowledge. Facts are reinforced where it is not factually appropriate and facts are played down or overlooked that actually require greater attention. An assessment of the quality from the outside is very difficult and therefore so dangerous. Even journalists, who are often under time pressure and search for topics in the ever faster online world, often lack the qualitative underpinning or simply the time for proper research. This is especially true in difficult professions like the financial world.

More productivity with fewer messages

As a stock investor, it is of course important to read and analyze news. Only when you read everything you get on the table or in your e-mail does it become impossible to concentrate on your core tasks. In this respect, it is of great importance to set a filter in order to distinguish the spam from the really good and informative messages. If you manage to process only half of the information, you are already doubling your productivity. In the end, this benefits the return. Most recently, the media was heavily influenced by the crash in February and attempts to explain it. But reporting on companies also primarily reports on the past and analyzes what went well and what went bad. On the one hand, this is understandable, since it is this information that the companies publish themselves, but this does not offer any added value beyond what not everyone could extract themselves from the original documents. The problem with this content is that it is backward-looking. An attempt is made to explain the development of the past. This offers little added value, because if the information is not processed, you have little value for future share price development.

In addition, it has become very common in recent years for companies' financial reports to present adjusted and adjusted earnings figures in addition to the accounting regulations, which are not subject to uniform standards and sometimes follow very arbitrary presentations. If you don't read carefully, you sometimes work with completely irrelevant or falsified orders of magnitude. Analyzing the past is only valuable if it is linked to other information and probabilities. However, this is a laborious undertaking that few have the patience and time to do.

As a consequence, this cornucopia of media information leads to irrelevant information in abundance, which ultimately is not suitable for improving your return on investment, but rather undermining your productivity and clarity. To filter the right and relevant information, you can use the following three characteristics of good news. All others are, in direct terms, a waste of time.

Is the information descriptive of the past or is it forward-looking?

In order to be successful with stocks, one of the most important elements is to correctly assess and evaluate the future development of a company. If you are correct in many repeated cases and that against the general trend, you will be successful in the stock market and, viewed in sum and over a long period of time, achieve an adequate excess return. So don't ponder too much about things that describe the past, but look for the answers that may be forward-looking. Good news and analysis do this.

Does the article have a measurable hypothesis?

Anyone who is well informed about a topic because they have been an expert for many years or who has dealt intensively with a topic has their own opinion. Anyone who is also convinced of what he has developed, researched or analyzed has plausible and understandable reasons for it and can represent them. In addition, he can substantiate this opinion with facts and reveal his train of thought.

In short, when something is well founded, it can be cast into a measurable hypothesis. Hypotheses can be checked and refuted or confirmed on a factual level. For this, too, a substantive discussion is necessary. This is work and the power of thought that really creates added value.

In this context, it can also be particularly interesting to look for information that is contrary to the masses. Finding counter-arguments and giving them proper reasons is much more difficult than joining the crowd. Such information is very valuable, as it is here that really new, previously not considered knowledge can be gained. Of course, the requirement for a measurable hypothesis must also apply here.

Is the article based on data or opinions?

Data from reliable primary sources, such as company figures from annual reports, economic data from the Federal Statistical Office, the Bundesbank, etc., are more valuable than statements and opinions from individual people that are not based on hard facts. Data-related statements are more reliable and, above all, verifiable. That means you can check the source of the data yourself and back up the arguments or maybe even gather additional or contrary facts.

Have your own opinion!

The most important point, however, is to have your own opinion. If you have not formed your own opinion about a company or an event, it is much easier for you to be influenced by irrelevant information. If you have made your own impression, then only constructive arguments can cause you to change your point of view.

This also applies to stocks. Before buying any stock, you should have your own hypothesis that can be measured and tested. This is the only way you can track over time whether your assessment is correct and whether the company is on the right track. Even with your own investment hypothesis, you will not be influenced by bad information because you are better informed. Viewed the other way around, you will only then recognize good information that will expand your knowledge and thus increase the chances of a correct assessment.

Conclusion

Today we live in a world in which the density of information is increasing, but the quality of the content leaves something to be desired. This observation accumulates many times over, especially in the financial industry and in times of unrest. Alleged experts speak of crash scenarios or great opportunities and have answers to the whys and whys. When the information is overloaded, however, it quickly becomes clear in many cases that a large part is nothing more than a background noise that cannot help improve your investment results. Correctly filtering messages is therefore an essential task in order to sustainably increase productivity and ultimately also the return on investment.

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