Showing posts with label nobody is perfect. Show all posts
Showing posts with label nobody is perfect. Show all posts

Sunday 1 January 2023

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.

Friday 29 May 2009

Remember, Nobody's Perfect

Remember, Nobody's Perfect

No investor - not even the greatest investors in the world - are right all the time.

Don't be discouraged when your system calls for you to lock in losses on a stock; not even the best investors in the world are right all the time.

Martin Zweig says:

"In the long run,
a 60% success rate translates into huge gains,
a 50% rate into solid gains, and
even a 40% rate can beat the market."


When it comes to the stock market, no one is right all the time - or even nearly all the time. Even the great Warren Buffett makes bad investments. Just read Berkshire Hathaway's annual report, and Buffett will often speak candidly about where he's gone wrong.

Some examples from a fund manager. A particular portfolio of theirs, by being right 62.7% of the time - on less than two-thirds of its picks - had more than tripled the gains of the S&P over 5 years. For the most part, their portfolios had accuracies between 50 and 60 % - far from perfect - and most had still doubled, tripled, or quadrupled the market. Being aware that no one can be right all the time, or even nearly all the time, can make it easier on your ego when your selling system calls for you to take a loss on a stock.

While you'll never be right all the time, you can be right more than you're wrong, however. In the end, the key is to develop a fundamental-based selling and rebalancing plan and stick with it, NO MATTER WHAT. When your portfolio does lose ground from time to time, you'll inevitably feel the urge to sell certain stocks and go after others on a whim or a hunch to make up ground. But if you have a detailed, quantitative selling system in place, you can help keep short-term emotions from wreaking havoc with your long-term performance.