Lessons from Charlie Munger-XIII - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Lessons from Charlie Munger-XIII

Oct 5, 2012

In the previous article, we discussed the contrast misreaction tendency and elaborated how it has an adverse effect on investments. Today we shall discuss yet another erroneous psychological tendency that causes investors to misinterpret information, resulting in wrong investing decisions.

Availability-misweighing tendency

The first thing many people do after they wake up in the morning is grab the newspaper. Reading the paper gives us a sense of what's going around in the real world. The same is true for television news channels. Based on what is served to us by the news media, we build our mental model of what the real world outside is like.

But does this mean that the news stories presented by the media are the most important and legitimate issues concerning us? What about issues that don't make it to the newspaper or the TV but still could be very relevant and vital? This discrepancy often leads us into a distorted view of reality. What appears more often and more prominently around us assumes a lot more importance than it may deserve. On the other hand, issues that may not be discussed could be disregarded as trivial.

This brings us to availability-misweighing tendency. What does it mean? Charlie Munger explains it very aptly quoting a song: "When I'm not near the girl I love, I love the girl I'm near." The human mind has a tendency to focus on what's easily available. And in doing so, often tends to give undue importance to it. On the other hand, the significance of things and events that are not easily accessible could be undermined.

Availability-misweighing tendency in the stock markets

Business fundamentals and earnings drive stock prices over the long term. However, on a day-to-day basis, it is the relentless flow of news and information that sends markets up and down. Owing to this intricate relationship with news, the stock market is one place that most easily falls prey to the availability-misweighing tendency. Isn't it often observed that news items that are prominently projected in the media elicit substantial response from the stock markets? In other words, the markets are ready to react to any information that is made available to them. This also means that important matters that are not covered by the news media may be ignored by the stock markets.

Take for instance, the recent slew of economic reforms announced by the government. The initiative has been covered extensively by the media. Though most of these reforms are not very significant and are unlikely to have any major positive impact on India's economic growth in the near future, the sentiment on the Indian bourses has suddenly turned optimistic.

The case of individual investors is also very similar. Stocks that are most widely talked about in the media often make an easy entry into the stock portfolio. Many companies tend to use this tendency to prop up their share prices. Using their PR machinery, companies bombard the media with press releases, interviews and news reports about every trivial development and achievement, many of which may not have any major impact on earnings. But in the absence of other relevant information, investors often end up giving undue importance to such insignificant matters.

In the next article, we will discuss what investors can do to avoid falling prey to this think error.

Lessons from Charlie Munger Article Series - Previous article | Next | All Articles
Try the Charlie Munger Quiz

Equitymaster requests your view! Post a comment on "Lessons from Charlie Munger-XIII". Click here!


More Views on News

Smallcap Revival: Should You Wait, Keep Holding, or Buy Now? podcast (Views On News)

Jan 25, 2021

Here's how to not miss 10 best days for your portfolio returns.

You Are What You Believe (Fast Profits Daily)

Jan 25, 2021

In today's video, I'll show you why it's not a good idea to blindly support the bullish consensus prevalent in the market these days.

Is the Tata Motors Stock Running Out of Juice? (Profit Hunter)

Jan 25, 2021

Is the valuation for this 5-bagger running ahead of its fundamentals?

Will the Top Mutual Fund Schemes of 2020 Be among the Top Performer in 2021? (Outside View)

Jan 25, 2021

PersonalFN explains whether you should invest in top performing mutual funds of 2020.

Great vs Good: Which Stock Will Win in 2021? podcast (Views On News)

Jan 22, 2021

Rahul Shah discusses which group of stocks performed the best in 2020 and its implications for your portfolio.

More Views on News

Most Popular

Top Investing Gurus of India

Investing gurus are the champions of value investing. These are the people who've mastered the art of compounding wealth from...

Time to Book Profits in Pharma Stocks (Fast Profits Daily)

Jan 15, 2021

In this video, I'll show you why it might be the right time to take money of the table in pharma stocks.

Smallcap Stocks: Your Best Bet for 2021 and Beyond (Profit Hunter)

Jan 15, 2021

The pandemic failed to thwart Richa's investing success formula for 2020.

Buzzing Sectors Before Budget 2021 (Fast Profits Daily)

Jan 12, 2021

The budget is just a few weeks away. Which stocks can you expect to move? Find out in this video.

Here's Why Smallcaps Could Be Your Best Investment in 2021 (Profit Hunter)

Jan 12, 2021

Select smallcaps hold a great potential to become the multibaggers of tomorrow. Here's how you could get in early into these stocks.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Jan 25, 2021 (Close)