Expect the Unexpected

Money magazine recently published an article where some of the nation's leading business owners offered advice to readers. With a diverse list of experts and many nuggets of wisdom, at times the advice starts blending together.

However, one piece of information caught my eye and separated itself from the rest. The wisdom came from Dallas Mavericks owner Mark Cuban and addressed investing. Cuban has a long history as an entrepreneur and famously sold Broadcast.com to Yahoo! for $5.9 billion. His advice centered on investors' need to perform adequate research before investing. He rhetorically asks, "Unless you think you have better insight on a stock...why are you trading?"

I respect Cuban's success and feel that this question is an important one. As a big believer in the need to perform detailed research to justify each investment, the advice is sound. However, it is also ripe for misinterpretation. Many investors have fallen in love with a need to know that leads them on a quest for certainty.

We live in an age where data is readily available on nearly every topic imaginable. With increased information, investors allow themselves to fall into a trap where every price movement must be explained and every market wrinkle understood.

As someone who spends hours studying individual companies, I agree that research provides a tremendous edge. However, it is not a panacea. Markets are not driven purely by cause and effect. Often, it is the unexpected and unknown that provide the largest jolt. Those who believe that adding additional data will make predictions more accurate are wrong. New information will not improve the quality of predictions, but it will make investors more confident in their findings. Over confident investors with imperfect conclusions is a recipe for disaster.

An example can be seen in last Friday's stock market performance. Thursday was bullish with 11 of the 14 indices I track hitting synchronized highs. Earnings season was off to a strong start and the bulls could rely upon positive results to justify the move. On Friday, the market started poorly, but was in positive territory by 10:30. When word that the Securities and Exchange Commission (SEC) was charging Goldman Sachs (GS) with fraud hit the newswire, prices quickly collapsed and an entire week's worth of gains evaporated.

Excluding the few people with advance knowledge of the SEC's actions, the GS blindside was an unexpected event with broad consequences. The rumors of GS's bad behavior had been circling for weeks, but no one cared until it affected stock prices. Investors could have done as much homework as the liked, but in typical fashion an unexpected event triggered the largest tremor.

As we look toward the upcoming week of 4/19 to 4/23 remember this lesson. As outlined in my weekly newsletter EPIC Insights, after a slow start, earnings season will become very busy with 25 key announcements this week. Investors will gravitate toward these data points, but they should not be the sole focus. As GS shows, we must always be alert for unexpected events and flexible in our investment approach. We will never know the cause for every price movement and those who wed themselves to the need to know will be left frustrated. Information is good, but the belief that additional data can answer every question is misguided.