How Much Research and Analysis Are Sufficient?

 Two shortcomings on trying to obtain perfect knowledge

Some investors insist on trying to obtain perfect knowledge about their impending investments, researching companies until they think they know everything there is to know about them. 

They study the industry and the competition, contact former employees, industry consultants, and analysts, and become personally acquainted with top management. 

They analyze financial statements for the past decade and stock price trends for even longer. 

This diligence is admirable, but it has two shortcomings. 

• First, no matter how much research is performed, some information always remains elusive; investors have to learn to live with less than complete information. 
• Second, even if an investor could know all the facts about an investment, he or she would not necessarily profit. 

80/20 rule

This is not to say that fundamental analysis is not useful. It certainly is. 

But information generally follows the well-known 80/20 rule: the first 80 percent of the available information is gathered in the first 20 percent of the time spent. 

The value of in-depth fundamental analysis is subject to diminishing marginal returns. 

Information is not always easy to obtain.

Some companies actually impede its flow. Understandably, proprietary information must be kept confidential. 

The requirement that all investors be kept on an equal footing is another reason for the limited dissemination of information; information limited to a privileged few might be construed as inside information. 

Restrictions on the dissemination of information can complicate investors’ quest for knowledge nevertheless. 

Business information is highly perishable.

Moreover, business information is highly perishable. 

Economic conditions change, industries are transformed, and business results are volatile. 

The effort to acquire current, let alone complete information is never-ending. 

Meanwhile, other market participants are also gathering and updating information, thereby diminishing any investor’s informational advantage. 

David Dreman recounts “the story of an analyst so knowledgeable about Clorox that ‘he could recite bleach shares by brand in every small town in the Southwest and tell you the production levels of Clorox’s line number 2, plant number 3. But somehow, when the company began to develop massive problems, he missed the signs....’ The stock fell from a high of 53 to 11.” 

Wall Street analysts' recommendations may be less than stellar

Although many Wall Street analysts have excellent insight into industries and individual companies, the results of investors who follow their recommendations may be less than stellar. In part this is due to the pressure placed on these analysts 

• to recommend frequently rather than wisely, but 
• it also exemplifies the difficulty of translating information into profits. 

Industry analysts are not well positioned to evaluate the stocks they follow in the context of competing investment alternatives. 

• Merrill Lynch’s pharmaceutical analyst may know everything there is to know about Merck and Pfizer, but he or she knows virtually nothing about General Motors, Treasury bond yields, and Jones & Laughlin Steel first-mortgage bonds. 

Investors frequently benefit from uncertainty and making decision with less than perfect knowledge

Most investors strive fruitlessly for certainty and precision, avoiding situations in which information is difficult to obtain.  

Yet high uncertainty is frequently accompanied by low prices.  By the time the uncertainty is resolved, prices are likely to have risen. 

Investors frequently benefit from making investment decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty. 

The time other investors spend delving into the last unanswered detail may cost them the chance to buy in at prices so low that they offer a margin of safety despite the incomplete information.

Types of Investment Information

Investment information can be divided into 5 types, each concerned with an important aspect of the investment process.

1.  Economic and current event information.

This includes background as well as forecast data related to economic, political, and social trends on a domestic as well as a global scale.  Such information provides a basis for assessing the environment in which decisions are made.

2.  Industry and company information.

This includes background as well as forecast data on specific industries and companies.  Investors use such information to assess the outlook in a given industry or a specific company.  Because of its company orientation, it is most relevant to stock, bond or options investments.

3.  Information on alternative investment vehicles.

This includes background and predictive data for securities other than stocks, bonds, and options, such as mutual funds and futures.

4.  Price information.

This includes current price quotations on certain investment vehicles, particularly securities.  These quotations are commonly accompanied by statistics on the recent price behaviour of the vehicle.

5.  Information on personal investment strategies.

This includes recommendations on investment strategies or specific purchase or sale actions.  In general, this information tends to be educational or analytical rather than descriptive.

Dealing With Information Overload When Investing

By: IS
Date posted: 02.22.2012 (5:00 am) 

It’s a rather common feeling these days isn’t it? I generally feel like I have a fairly good grasp of most stocks that I follow but even that isn’t always true.

Think about how things were in previous generations:

Someone thinking about buying a stock might have bought a newspaper, looked at a few columns or an article about that company and tried to figure out how good of an investment it is. That research would probably have taken a few minutes…then what?

Researching A Stock In 1960

-Reading newspaper to get stock quotes and economic analysis

Researching A Stock In 2012

These days, that process can lead you down a very exhausting road:

-Looking at charts getting technical indicators such as trend analysis
-Going to read the company’s financial reports
-Listening to earnings calls as well as Q&A with analysts
-Going through Wall Street and other research which is often available on the web
-Going through media such as the Wall Street Journal and The Globe and Mail
-Going through Blogs analysis (this one alone could take many days)
-Looking at social media talk about the stock (Twitter, etc)
-Doing a similar analysis for the sector and for both clients and suppliers

There Is No Way To “Complete” Your Analysis

At what point would you consider that you’ve gone through all of the information? It just seems to me like you can never reach that point. At that point, the game becomes as much about being able to judge:

-what information has most value
-how to go through it quickly but efficiently
-how to either come to a conclusion or move on to a new stock if it non conclusive

Personally the RSS Reader Is My “Filter”

I personally have many of my top information sources setup in my RSS reader and every day I go through them very quickly marking those that I want to read further. How? I guess to some extent I must rely on the title and images to seem accurate as I probably spend a few seconds at most to make that determination.

How do you deal with information overload when investing?

http://www.intelligentspeculator.net/investing_commentary/dealing-with-information-overload-when-investing/

Coping with information overload

Coping with information overload
By Leon Gettler
SMH

One of the big issues now is information overload. It’s coming in from everywhere, thanks to multi tasking and email.

It’s just an avalanche of information, whether it’s from phone calls, attachments, Power Point presentations, instant messages and newsletters or social media.

In case you missed it, last week was Information Overload Awareness Day. It was suggested that people put their smart phone on mute and not check their email every time the pop up appears on the screen.

But that’s not really a solution. People might be able to do that for an hour or so, some even a day, but in the end they will go back to what they have always done. Information overload is now a permanent part of our lives. So what should we do about it?

According to a study from LexisNexis, reported here, half the Australian workforce of professionals is feeling demoralised and totally overwhelmed by the amount of information pouring in and, according to Marc Peter, Director of Technology and Business Development at LexisNexis Pacific, that’s leading to “information rage”.

Significantly, the study found that 50% of Australian professionals say that on average, only about half of the information that comes their way every day at work is actually important to them getting their job done.

Furthermore, only 40% of email that lands in their inbox helps them do their job (in my case, it's about 20%), 88% of Australian workers say they want to spend less time organising, and more time using the information that comes their way, Only one in five Australian professionals says the company has bothered training them on information management.

These figures tell us one thing: white-collar workers right around the world, from New York to Sydney, say they spend as much time wading through information as they do using it to get on with their jobs. And in every market, most employees say that the amount of information they have to manage at work has significantly increased since the economic downturn.

So what’s causing it? Many would say the Internet, but management consultant James Adonis begs to differ. He says the problem is not the amount of information. It's more about our inability to handle the onslaught.

"We can’t blame the Internet for it all,’’ Adonis says.“Whilst it’s undoubtedly exacerbating the issue, information overload has been around for decades. It’s just that today it’s instantaneous. With transmission of data from one person to another so effortless, we’re oblivious to the potential anxiety of the person who may not need (or care about) the information we’re conveying."

"Contrary to the theory of too much information is a contrary theory dubbed ‘organisation underload’. Proponents of this philosophy suggest it’s not an abundance of information that’s the problem; what’s really causing the angst is our inability to deal with it.”

Clay Shirky, one of the most prominent and best read commentators on the internet and new media, expands on this point. He says there is nothing new about information overload, it has always been with us. The problem, he says, is we haven’t yet learned how to filter stuff from the Internet in the same way as, say, a library card system.

Management consultant Tom Davenport makes an interesting point in the Harvard Business Review. He says we don’t deal with information overload because we actually like it.

“Our work and home lives can be pretty boring, and we're always hoping that something will come across the ether that will liven things up. If I turn up the filtering on the spam filter or turn off the smartphone, I might miss out on an email promising a new job, a text message offering a new relationship, an RSS feed with a new news item, and so forth. Every new communication offers the frisson of a possible life-changing information event, though it seldom delivers on the promise.”

Still, the LexisNexis study suggests it’s a problem, whether we want the information or not.

Published: 03 November 2010

http://content.mycareer.com.au/advice-research/workplace/information-overload.aspx?s_rid=smh:rainbowstrip:box2:campaign2:content2:09-11:02-04_howtodealwithworkplac:howtocopewithinformationoverload

The Information Trade-Off

Obtaining more information can help improve the quality of decisions by providing more detail about impacts and reducing subjectivity over probabilities.  It also helps to build up awareness of other alternatives that could be taken.  In general, it is a given that seeking more information will be beneficial to decision makers, having the general effect of reducing the level of uncertainty involved in a decision, and making it more likely that the outcomes of particular decisions will provide opportunities for learning.

However, there is a trade-off to be made.  Decisions usually have to be taken within a particular timeframe, and getting more information takes time.  It can also cost moneuy.

Both of these have implications for the level of extra effort that goes into facilitating more informed decision making.

The decision makers can reduce subjectivity by researching what is going on in various areas.  As they learn more and more, the probability that they are assessing becomes less and less subjective.  In the end (in theory at least), they can arrive at an objective probability.  However, there are some important issues facing them:

• getting information takes time:  the report must be submitted at a given deadline, even if they havent't pinned down the probability of the event occuring.
• gettting information costs money:  doing research will use up the resources of the business; you have to decide how much investment in information to support decision making is appropriate; this means assessing how sure you can be of the information you do have, and how much more certainty can be achieved for a reasonable cost
• situations change over time:  as you collect information to help you make a decision, the context or nature of the decision may be changing; there may be a limit to the accuracy you can achieve.

Inevitably, decisions have to be made with limited information.  Before you make a decision, you have to decide whether the information at your disposal is sufficient to make the decision, or whether you are going to make an investment (in terms of time or money, or both) in getting more information - and how this might affect the nature of the decision itself.  (You also need to guard against certain psychological traps.)

Management actions feed into decisions and affect their outcomes, whether this is in the form of considering decisions for longer, obtaining more information or just bringing different personal perspectives and experience to bear on the decision.  There will always be uncertainty involved, but by putting time and effort into decision making, its negative effects can be minimised.  In many decision situations, there is a 'third way' - the choice not to follow one of the branches on the tree, but to invest more effort in refining the picture of the decision before it is taken.

This poses interesting questions:

• how much is your time worth?
• what potential downside of this decision would you be prepared to accept if you could spend the time thinking about another issue instead?
• what potential upside do you regard as being a good 'purchase' to make with your time?

Up to this stage, you have acquired the knowledge you need to assess whether simple games of chance are worth playing.  Business decisions are much more complex and subltle than this, and you will never reach a point where you 'know everything', as in the dice game.  The issue is how much time to put into making a decision, and whether to put additional resource in obtaining more information before making the decision. 

In the end, this is likely to be a judgement call.  While time can be quantified and given a nominal cost,k the benefit to be obtained from it is likely to be very difficult to quantify.  In fact, until you actually invest the time, you cannot know how beneficial the information you gain will be.  We have to deal with this contradiction every time we take a business decision.