The Motley Fool

How to Tell the Difference Between Meaningful News and Short-Term Noise

Sometimes it’s a good idea to buy shares of a wonderful business and hold it while not paying attention to the news based on the day-to-day movements of the stock. Sure, it’s important to be informed, as there could be real, meaningful news relating to a company’s long-term fundamentals, but sometimes short-term stock fluctuations and the reasons behind them are just noise.

If you’ve done your research before you’ve bought shares of a stock, then you should be comfortable holding on to your shares if the markets were to close for the next five years. This is how Warren Buffett approaches stock selection. Look for stocks of wonderful businesses that have a durable competitive advantage with the ability to grow earnings at a reasonable rate over the next decade. The company should also be trading at a discount to its intrinsic value at the time of the purchase.

If you don’t see yourself holding on to a stock for more than five or even 10 years, then it’s probably not a good idea to buy the stock as a long-term investment; if you do, your future self could be more likely to sell the stock at a loss.

But if you’re an experienced investor with the discipline to not be influenced by short-term noise, then you could use it to your advantage. If you can correctly identify the difference between short-term noise and news that could impact the long-term fundamentals of a company, then you can lower your chances of selling at a loss by hanging on if you know the news is short-term focused. You can also discover magnificent buying opportunities if there’s a sell-off triggered by a short-term-focused event by loading up on more shares while they’re cheap.

You could become rich in the long run by purchasing shares of beat-up companies while they face temporary weakness.

Spin Master Corp. (TSX:TOY) is one such stock that sold off because of short-term noise. The overblown “Hatchimals wouldn’t hatch” stories and class-action lawsuits brought on by angry parents brought the high-flying stock down. Everyone was focused on the short term, but smart investors knew that the dip was nothing more than a buying opportunity to get in to a wonderful growth business at a huge discount to the intrinsic value.

The stock soared 11% in a single trading session once investors realized the company’s long-term fundamentals were still intact. The company is set to release a new and improved Hatchimals 2.0 and a line of collectible miniatures called Colleggtables. Both of these new products have the potential to launch the stock into the atmosphere over the next few years. Once this happens, everyone will forget about the “Hatchimals wouldn’t hatch” concerns and realize what a huge buying opportunity the short-term noise brought on.

Sometimes it’s not easy to tell the difference between meaningful news and short-term noise. It’s a valuable skill that you’ll pick up in time by thinking like a long-term value investor.

Stay smart. Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette owns shares of Spin Master Corp.

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