Analysis Paralysis


Some people have a quick trigger when it comes to buying stocks.  They watch a program like Jim Cramer's Mad Money, hear him yell a five second blurb on a stock, something like "I like it!!!", then watch him hit a button that makes a noise.  The next day they buy the stock.  At the opening.  Without any further research.  If they were attentive, they at least got the symbol, so they didn't have to look that up.  Those people then hope for the best.  Sometimes they get it.  Most times not.  (This is not a negative on Jim's show.  He does a solid homework on a stock before he
comments on it.  He's very bright and helps a lot of investors.  It's just that some investors stop their research when his show ends.)

Other investors are at the other end of the spectrum.  They certainly watch programs that give them stock ideas but then they go into a much different mode.  One I call Analysis Paralysis.  In other words, they rarely get around to buying anything because they fear there is one more data point they might have missed, the one they're sure will make the difference between success and failure.  So they end up watching stocks instead of owning them, fearful that if they actually bought one it would surely go down because they didn't have enough information that would explain why.

Somewhere in between these two extremes sit most investors.  But if you're leaning more toward the latter than the former, you may be better suited in the bond market where the volatility is much lower.  So are the rewards.

Here's the thing: you can never have all the information that leads to a good investment deicision.  It's part of investing.  You have to learn to live with the anxiety that brings.  Even with the full disclosure rules that require all information to be available to the public at the same time, you're never going to know all the pertinent details.  That's because many of them come from investigative research that require asking questions well beyond what's given by the company.

Here's an example.  In the recent IPO of Ceasar's, all the numbers were reported that are required by the SEC (Securities and Exchange Commission) in order to go public.  But smart investors know that the growth for the casino industry is in Asia, in particular on Macau, the tiny island that did almost 5 to 6 times the volume of gambling that Las Vegas did last year.  Ceasar's has stated it wants to expand to Asia but hasn't yet.  Most of its properties are in Las Vegas.  And management is spending less on refurbishing all of them than Wynn Resorts is on one of theirs.  Also, its debt is many times greater than most other casino owners, making it difficult to expand further or even keep properties current with trends on the Strip.  Unless investors look at numbers from most or all other casinos, they're not going to know this latter fact.  It certainly wasn't in the propectus.

So while absolute numbers are in print, it's imperative investors have a macro view of the industry to understand if the stock is a good investment, where it stands against its competition, and where the industry is going and growing.  Ceasar's is only a current example, and it looks good on paper, but there's much more to the story than just the prospectus numbers can tell.

Investors looking to find the whole story never will.  They need to learn to live with less than the total, or they'll never invest.  They need to train their minds to ask every type of question that might shed light on a decision but  know that they won't think of every question.  It's impossible to know an industry in depth unless you work in it or a research analyst that does nothing but cover that industry.  That's why reading research is essential, particularly third party research like Value Line where the information is completely unbiased because they don't worry about getting the next secondary stock issue or bond offering.  Wall Street research can be excellent as well but keep in mind that they write up companies mostly to stay in good graces with management so they can have a competitive edge for the next underwriting.  If investors get some use from it, that's great.  But they're in it for the fees from the companies, not giving away information to investors.

Analysis is critical to any good investment decision.  Just don't keep at it so long that you have analysis paralysis.  Learn to live with your own humanity, the part that makes mistakes and learns from them.  And know you won't know as much as you want, but over the years, you'll learn to ask better questions.

- Ted Allrich
February 14, 2012

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: CZR

Ted Allrich

Ted Allrich

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