The Information Diet: Bad for Your Investment Portfolio

They say that information is power. Data providers think so. Prices delayed by 15 minutes can usually be had for free, but real time prices cost thousands of dollars per month. Data providers and hedge fund managers will place their own servers in the same building as that of a securities exchange, just so that they can gain an extra few microseconds of an information edge over the rest of the market.

High frequency traders pay exchanges to allow them to see prices a split second before anyone else (don’t ask me how this is legal, it certainly isn’t ethical). There are strong insider trading laws banning the use of information that is obtained inappropriately, another pointer to the value of information.

Trading desks have a minimum of four screens per trader. Smart phones stream news and data to you wherever you are. Dedicated news channels provide 24 hour coverage of the global markets. Newspapers, magazines, newsletters and commentators provide in depth analysis of various financial events.

If an investor where to try and read or watch every information channel available, they wouldn’t have time to do much else. Even if an investor were to restrict themselves to a daily paper, such as The Financial Times, a weekly news magazine, such as The Economist and an hour of TV news a day, that is still a lot of time, especially if the investor wanted to analyse and synthesize the information . What, then is the solution to the “information is power but extremely time consuming” dillema?

The first step is to understand why you personally want the information. Be honest with yourself. The number one reason that I have seen is that it has become an addiction. By this I mean that most people have reached the point that they can no longer control how much information they seek. They cannot voluntarily stop for more than a day or two, some not even for an hour. If the information is forcibly cut off, e.g. the internet is down, then these information addicts will feel tremendous anxiety. This is not good as such people end up wasting their lives chasing information.

To test if this is true, restrict yourself only to voice call and work email. Nothing else, no newspapers, no blogs, no internet, no TV. See how long you last.

The second group of information devourers are in the pre-addiction phase, driven by a fear that they might miss something important. Tell tale signs of whether you fit into this group include hoarding or never throwing anything away. It does not matter if you are organised about it, it remains hoarding.

You probably won’t recognise hoarding in yourself, but think about this: if you go to the cinema and drink one of their super sized soft drinks, when you invariably feel the urge to go to the restroom, do find it easy to simply get up and go, or do you torture yourself holding it in until either the movie is over or you explode? If it is closer to the latter, then you might be a hoarder.

The third group are the ones who use information as currency. They usually do not have any access to real high value information, so instead they settle for being the first one in their clique to disseminate the information. Remember the kid in school who would always be the first to put their hand up? That’s a disseminator. If you use Twitter a lot, especially if you retweet a lot, then you’re a disseminator.

So far the evidence, anecdotal though it is, points to the conclusion that the large majority of high information users are wasting their time. But even if that conclusion is correct it does not mean that successful people do without information, or even that they need only a small amount of information. I think, however, that we can learn a few things.

Consider famed investors George Soros and Warren Buffet. They manage tens of billions of dollars. The number of trades and investments that that represents is simply massive. Just to understand what is happening to their portfolios would mean an overwhelming amount of work. Even if this information is summarised by their teams, how can you keep up with it all? Add to that the amount of information necessary to review other investment opportunities and it becomes difficult to conceive of Soros or Buffet approaching the information puzzle as most people have.

The answer, I believe, lies in two facets. The first is that the amount of information necessary to understand an investment is actually small and successful investors learn what to filter through and develop the discipline to ignore all other information.

The second facet is that there is an information self-selection process that happens as you become successful. What I mean by this that as you succeed you will automatically attract higher quality opportunities as lower quality ones drop away. You’ll still get crap and not all the good opportunities will come to you without your having to work hard for them, but just a small improvement in this ratio translates into big gains.

The take away here is that you need to take a close look at how much information you are attempting to digest as well as its quality. Focusing on the handful of data that gives you the greatest edge (think 80/20 rule) is far better than attempting to gain a complete picture (an impossibility and a major cause of procrastination).