If It's Bad News, It's Serious - So Don't Tell The Boss

The Age

Saturday September 30, 2006

MARCUS PADLEY

ONCE did a course on office politics. Yes, they teach that stuff. Essential instruction for Poor Dads trying to be Rich Poor Dads.

The basic tenets are that "management is where the money is" and that "your colleagues are your competitors" when it comes to getting a seat on the gravy train.

The good news is that office politics is not hard to pick up. Amazingly enough, it involves some pretty obvious skills. At the everyday level the game is about manipulating people, including the boss.

There are techniques involved based on psychological principles, principles that any investor would be well served to know. It is all to do with "cognitive bias".

Without realising it, all of us are prone to believe what we want to hear and reject what we don't want to hear. In investment terms this is a pretty important mental weakness we all possess, often unknowingly. It means that if new information is highly representative of our existing beliefs, we will readily accept it and if it conflicts with our existing beliefs, we are less ready to accept it.

In other words, if we already hold a stock we readily accept any good news. It explains why a stock can fly. It is a frenzy of new holders readily believing all the good news and quickly rejecting the bad.

It also means that it takes a lot longer for us to change our minds than it does for us to have our opinions reinforced.

This explains why the tech boom blew up in three months and deflated in two years. We took on the bad news (reality) far more slowly than we took on the good news. It is why stocks always rise like rockets and fall like hot air balloons.

But rather than identifying bias and doing the opposite, bias can be good. It is the life blood of the day trader. Bias creates and prolongs momentum. If you buy early, it is comforting to know that everyone wants to believe and promote the good news and will be slow to accept or broadcast the bad news.

There is a daytrader's rule that says if a stock is flying and closes on its high, you should buy on the final crossing because it will gap up the next morning. Closing on its high suggests the bias is firmly established and will extend itself into the next day.

It also means you have to be pretty careful with information. A few obvious rules include:

? Understand your own bias. Do you hold the stock? Has your brain gone soft on it?

? Check every comment to determine whether the commentator holds the stock.

? Even if commentators declare their interest, it doesn't mean they aren't biased. They may not recognise their bias.

? Treat bad news more seriously. Even if you don't believe it, someone else will.

Although bias may seem to be a short-term effect, you should know that long-term collective bias can and does exist. It happens when the whole market believes the same thing. For instance, at the moment we all believe that:

? Banks are good investments.

? Woolworths is a safe stock.

? The resources boom will go on for decades.

? The oil price is up forever.

When the whole market is biased, the theme is unlikely to reverse quickly. So you are safe investing in a collective bias. Of course, there is a lot of money to be made spotting a change in collective bias. But how do you do that? It is much easier said than done. The only obvious lesson is this: recognise your own bias and pay more attention to any information that challenges it.

Back to the boss. How to climb the corporate ladder? It is easy. In fact, this one simple lesson will soon put you firmly in control of everyone, including your boss. Just tell them what they want to hear. They will readily believe you and love you for it. For anything else, just send in your competitor, sorry, colleague, with the news.

Marcus Padley is a stockbroker and the author of the daily sharemarket newsletter Marcus Today. For a free five-day trial of the newsletter, go to www.marcustoday.com.au

© 2006 The Age

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