BEWARE OF ECHO-CHAMBER INVESTING

In high school I enjoyed debate. Our teacher did not allow us to choose sides, but randomly assigned us to our positions. Even though I was often assigned to support positions I strongly disagreed with, I put all my energy into studying and defending the side I was assigned to. In the process, I gained insight into the other side that I would not have had otherwise, as well as a greater appreciation for those who disagreed with me.
 
Today our society has lost the ability to have rational “debate,” but instead we dig our heels in and “argue” why we are right and the other side is wrong. I believe this largely comes from the new way we obtain our information. Although the internet has given us access to all the knowledge in the world, it also makes it easier for us to filter what we receive. Take Facebook® as an example. There is a reason people we follow are called “friends.” When we post something, our friends “like” our idea, largely because they tend to think like we do. We call this an “echo-chamber” because social media tends to reflect back at us what we already believe, confirming our foolish belief that everyone agrees with us. The ability to select the sources and political leanings of our information sources, has created an unhealthy environment wherein each side hears what they want to hear, and “unfriends” every other position.
 
This echo-chamber phenomenon can also create serious risks for investors. Once again, the ability to select the source of our information, and to be able to deselect sources we aren’t comfortable hearing from, limits our understanding of what is going on in the financial world. The purpose of investing is to allow money to flow to companies that will use it wisely and efficiently to produce profit. Therefore, the more information an investor can gather from multiple sources, the better able they will be to make informed decisions.
 
If, however, they only seek out information from sources who agree with them, whose methods they relate to, and even whose political beliefs they share, the results may be very one-sided. As a long time student of investing I must say I have been shocked at the valuations of many newer companies these days, while firms with a long history of producing profit and growth seem to be being abandoned. In many ways it’s beginning to feel like 1999 all over again, where people invest based on what they want to be true, or what’s in vogue in their echo-chamber world, rather than on financial reality. The results of this type of investing in the late 90’s was disastrous for many.
 
Investors should be aware of the human tendency to seek out confirmation of what we already believe, and take time to look at opposing research. Debate both sides of any investing issue before you decide and you may learn something from the other side that will ultimately make you a much better investor.