The World Today produces a Staggering Amount of Information, and 99% of It Is Meaningless
Age-Old Wisdom Provides Contemporary Guidance
With the advent of the digital age, information has grown at an astounding rate. Whole industries have been created around information: from data mining to algorithm development. Data has become one of the most important resources in the digital age. Many of this decade’s most successful young companies, such as Facebook and Google, have built their entire businesses around information.
It is tempting to believe that success in any field is now based on the quantity of information one is exposed to. Yet, age-old wisdom proves itself eventually. This is especially true in the field of investing, despite its susceptibility to the trends of today and fantasies about the future.
Focus on the Essentials; There Are Not One Hundred Essentials
One piece of wisdom I learned early in my career and have seen played out time and time again in both the professional and personal spheres is from American business-philosopher Jim Rohn. He said, “There aren’t one hundred essentials to anything.” This simple truism is timeless in its wisdom and applicable to many facets of life, including investing.
Anyone who has ever planned a lengthy trip has made checklists for preparation and packing, mentally if not in written form. While every item on the oft-lengthy list is an item deemed worthy of bringing, not every item is essential. Some can be purchased at your destination, and others could be left home without being missed at all. Certain items are, however, indispensable, such as your passport or travel documents, hotel information,
and of course, your methods of payment; a trip without these essentials would result in disaster.
Successful investing involves the same calculus as effectively planning for a trip; make sure you get the essentials right.
One of the Greatest Challenges Investors Face—Filtering Information
The key to successful investing is to figure out which information can be considered essential and to avoid
being weighed down by the massive quantity of irrelevant and distracting information. You can be right about a great many things, but if you are wrong on the essentials, you are in deep trouble.
The converse is also true: you can be wrong or even ignorant of a great many things, but if you are right on the essentials, you can be a successful investor anyway. Thus, one of the main challenges to successful investing is that of filtering, deciding which information is essential and discarding the rest.
The wide-scale adoption of index investing, or over- diversification with actively managed mutual funds, magnifies this challenge through information overload. By investing in so many securities (in some cases the entire investible universe of stocks) investors feel that all information is important. They feel responsible for developing a thesis on every company, sector, and macroeconomic trend.
Fight the Urge to Have an Opinion on Everything
Watch an hour of CNBC or browse the Wall Street Journal online and you quickly get the picture. The information these sources of “financial analysis” present covers a staggering array of topics. Investors can be exposed to information on interest rates and Federal
Reserve policy; the impact of technological innovations like artificial intelligence; using options to hedge or speculate; and more recently, block chain technology and cryptocurrencies. In fact, a single program or article might cover all these topics and more!
The tacit implication in these programs is that all this information is important and directly relevant to investment success, and you must include all these elements in your decision-making framework. We’ve discussed earlier that a student of everything is an expert on nothing, and how this principle bodes for the “shotgun method” investor. It is a framework for investing failure, not investing success.
Direct Common Stock Ownership Gives Investors an Opportunity to Develop Strong Opinions on a Few Things
The great investors never pretend to be a jack-of-all- trades. How could such distinct styles employed by investment gurus such as Warren Buffett, George Soros, and Peter Lynch produce such similarly astounding results over long periods of time? They each identified what was essential to them; they narrowed their focus.
Success in investing typically comes from developing an extensive knowledge within a precise area, and applying principles learned over time to this limited
field. It need not be limited to one company or one industry, but it should be small enough in scope that you can become proficient in this niche.
One approach that lends itself well to this strategy is directly investing in a small basket of common stocks. By doing so, you can narrow the scope of information necessary to make informed decisions and develop strong opinions about a few things. A handful of companies translates to a handful of financial statements, news stories, and other finite quantities of relevant information to study and consider every quarter. This empowers the investor to surgically allocate capital to known quantities, and to feel confident in the underlying fundamentals of these investments.
This article was first published in Taking Stock. Click here to receive a free e-book.