Value Investing: Tools and Techniques for Intelligent Investment

Chapter 19. Keep it Simple, Stupid^[19]

Too much time is spent trying to find out more and more about less and less, until we know everything about nothing. Rarely, if ever, do we stop and ask what we actually need to know!

• Our industry is obsessed with the minutia of detail. Analysts are often petrified of saying 'I don't know'. Something I personally have never had any issue with! It is a common misunderstanding that in order to make good decisions we need masses of information. However, nothing could be further from the truth.

• A new paper by Tsai et al. examines the confidence and accuracy of American football fans trying to predict the outcome of games. They found that people were just as accurate if they had six items of information as when they had 30! However, confidence (which exceeded accuracy at all levels of information) increased massively as the amount of information increased.

• This inability to process large amounts of information represents a cognitive constraint embedded within our brains. The simple truth is that our brains aren't supercomputers with limitless computational power. Rather than crashing mindlessly into our cognitive bounds, we should seek to exploit our natural endowment. So, rather than collecting endless amounts of information, we should spend more time working out what is actually important, and focusing upon that.

• When it comes to information overload, parallels exist between medicine and investing. For instance, in a certain hospital in Michigan, ...