Today I want to talk about information overload. Investors today are bombarded with more information than ever from an expanding array of sources. Many think this is a good thing but in reality it mainly leads to investor under performance. Investors and traders need to learn how to narrow their focus, limit their information intake, in order to increase their chances of success. I’ll share a few bits of info on this phenomenon and tell you how I deal with it.
First, I’ve blogged about information overload and under performance before. A snippet form that old post;
Investor’s today have more information than ever before. The financial media, investment blogs, social networking, stock analysts, modern corporate disclosure rules all inundate investors with information day in and day out. But one of the biggest lessons in behavioral investing is that more information does not lead to more accuracy. In truth its the exact opposite. More information leads to over confidence which leads to less accuracy.
Also, associated with this is confirmation bias. Most people tend to seek out information that confirms what they already believe instead of looking at the data objectively and then framing an outlook based on the facts. You see this behavior in all kinds of fields today, from politics to most scientific disciplines. A favorite trader aphorism of mine capture this brilliantly – trade what you see, not what you believe.
Let me give you an example of how this works in reality. A friend of mine says he’s a long term investor, his main goal is building a retirement nest egg. He’s a smart guy, very successful in industry. He’s read a good deal on investing and classifies himself and follows a buy and hold index fund approach in his portfolio. He also watches CNBC and Bloomberg every day, checks the prices and values of his portfolio every day, and reads a couple of news papers. Do you think this friend of mine is a successful investor? Do you think he will stick with buy and hold? No, he’s an absolute disaster. He can only stick with buy and hold when the market is going up. My latest conversation with him was about his opinion of an imminent market top due to the fiscal cliff and the middle east because he is sure all this is coming to a head soon. And he is far from alone. This is the kind of behavior that causes much of investor under performance.
How do I deal with this? A few ways. Both in my long term investing accounts and my trading accounts I have an automatic risk management strategy. In my long term accounts it is the following of the IVY timing model. In my trading accounts it is the following of my risk management rules. This removes most of my anxiety around my investments. Second, I narrow my focus. Every week, in fact every Sunday night before the trading week begins, I read two things – The Weekend Chart Show from The Kirk Report and Weighing the Week Ahead from the A Dash of Insight Blog. Both of these sources are very objective and data driven. The Kirk Report is $100 a year and well worth it and is more of a report for traders and A Dash of Insight is free and focuses more on investing. These sources do a great job of covering market developments, economic reports, bullish and bearish developments, etc.. Obviously, these aren’t the only good sources out there. The point is to find a couple of good sources of your own and limit your intake of others. Other than these two sources my investing reading is focused on company and investing fundamentals.
In summary, in today’s world and investor needs to develop an information management strategy. And more importantly a strategy that is aligned with your investment strategy. If you are truly a long term investor then why are you looking at prices and micro bits of information everyday or week? Having a narrow, focused information management strategy will significantly increase your odds of investment success.
Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.