Bottom Line/Personal: If you’re a dedicated investor and you pay attention to the news, you should be able to react quickly and get a jump on other investors by immediately buying or selling, right? Well, my guest today says that’s a fantasy, and he has a better way that individual investors can make use of all that news out there and come out wealthier.

I’m Steven Kaye, editorial director of Bottom Line Publications, and this is Bottom Line On Your Money, where our experts help you create, invest and protect your wealth.

Today I’m speaking with Vahan Janjigian, PhD, CFA. Vahan is editor of the MoneyMasters Stock Report newsletter, chief investment officer at Greenwich Wealth Management and author of two books, including Even Buffett Isn’t Perfect. Vahan is a legendary stock picker, but besides that, he has taught money management, financial theory and economics, so he understands the big picture for average investors.

Vahan, welcome. Thanks for coming out today. So as an investor, what’s wrong with paying attention to the news, especially when you can get news 24/7, anytime you want?

Vahan Janjigian, PhD, CFA: Well, there’s nothing wrong with paying attention to the news, but I think it’s a fallacy to believe that you can beat other investors using that information.

First of all, keep in mind that most companies will announce material information when the market’s closed—either in the morning before the market opens…or in the afternoon after the market closes. So the next time the market is open and available for trading, the price of that stock has already adjusted, so it’s too late for you to react to the news.

Also keep in mind that these days, you’re competing against these high-frequency traders who are willing to pay a lot of money to get the information—the same information you’re getting—just a fraction of a second before you do. That’s enough time for them to use their computers and algorithms to execute trades before you could possibly do that.

So the average investor is not going to be able to react to the news quickly enough to keep themselves from suffering a loss in the event of bad news or to make a large profit in the event of good news.

Bottom Line: So the high-frequency traders are basically racing with each other to shave the milliseconds off, and in the meantime, the average investor is basically left in the dust.

Janjigian: Absolutely. The average investor is at a distinct disadvantage, so the average investor has to think more of being a long-term investor rather than a trader.

Bottom Line: The high-frequency traders are basically fighting each other to get milliseconds ahead, and that leaves the rest of the regular investors, though, feeling maybe a little bit helpless. Is there no way they can use news to their advantage?

Janjigian: Well, yes, but it’s counterintuitive. In fact, when a company comes out with bad news and you know the stock price is going to fall and that we can’t possibly react to it quickly enough, you might want to sit back and think, Maybe I should do the opposite. Maybe this is an opportunity to buy more shares of that company and to average down my cost. If you’re a long-term investor, that should pay off—unless, of course, the company is in such big trouble that it eventually may go bankrupt. But usually that’s not the case. Usually companies may report a bad quarter or they might fall short of expectations, but they’re still profitable, and we see that the stock price sells off tremendously.

Now, there is some evidence that stocks do have momentum. So if you were to, let’s say, buy the shares of a company that announced good news immediately after that news came out, you might make a little bit of a profit, but you’re not going to be able to react quickly enough to make a large profit. So your profits are going to be limited.

You’re better off thinking about doing the opposite. If you own that stock, maybe this is a good opportunity to sell the stock rather than to buy more shares. On the other hand, if it’s bad news, use that as an opportunity to buy more shares.

Bottom Line: Can you give us an example of a time in your portfolio when some news came down the pike and you did exactly that—in other words, you went against the grain that most investors were going?

Janjigian: Very recently, I did it with a company called Rent-A-Center. The ticker symbol is RCII. They came out with their quarterly earnings report, and it was worse than expected, and not surprisingly, as soon as the market opened, that stock was way down. It was too late for me to try to sell before the drop.

But I waited a little bit and waited until the stock was able to settle, and then I started adding more to my position. And over time, it’s begun to pay off. The stock has started to turn around and crawl back up again.

In fact, when I look at the history of my investing, it turns out that I’ve made the most money in those kinds of situations—when a company that I really like comes out with some bad news and the stock sells off, I will build on that position, and eventually, because I’m a long-term investor and I’m willing to be patient, eventually that situation will turn around and the stock will do very well. And that’s where I make the big bucks.

Bottom Line: So you have to have a fundamental confidence, though, in a stock that’s now being challenged by the bad news. You have to know that you have a reason for going the other way.

Janjigian: You absolutely have to have a lot of intestinal fortitude to buy the shares of a company that came out with bad news.

Bottom Line: So what Vahan Janjigian is telling us is, if you have confidence in a company, stick to your guns when there’s bad news. It may even be an opportunity for you to buy more. And don’t try to outrace the high-frequency traders, because you can’t. Thank you.

Janjigian: Thank you, Steve.

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