The average person underperforms in life and their investments because they don’t take in enough information. Instead of spending time learning from books and reading the news, they waste it on frivolous activities such as scrolling through their Facebook or Instagram. As a result, they feel completely blindsided when a major bear market emerges that crushes their portfolio, or a recession rears its ugly head and causes widespread unemployment.
More sophisticated investors and traders tend to have the opposite problem. They read a lot and stay abreast of the latest news. In fact, they tend to take in too much information and try to make sense of it all.
This is especially problematic in a world where information is growing exponentially. In a world with too much information, it becomes hard to find the signal and easy to drown in a sea of noise.
Like many things in life, too much of a good thing is a bad thing. Everything has benefits and drawbacks. This includes learning and acquiring information.
- You benefit when you acquire a useful piece of information.
- You “pay” when you acquire a usless piece of information. This results in wasted time and energy, which is an opportunity cost.
- You “pay” even more dearly when you acquire a harmful piece of information. This happens all the time in finance. You learn about a fancy new trading strategy, and it actually loses you money in the long run. Just think about all the people who spent time learning about cryptocurrency trading in 2017, and their subsequent losses.
Whether you realize it or not, you are constantly being bombarded with information from marketers.
- A financial expert/advisor who provides smart sounding “analysis” in the hope of convincing you to invest with him.
- A media outlet that wants readers and viewers hooked on their news, which is good for their ad revenue.
- A trading guru who gives you a taste of something that works, in the hope of convincing you to buy his complete trading course for the low low price of just $499.
- A commentator who continuously appears on CNBC, in the hope of making himself more famous.
- A politician who tries to sell you his view of the world, so that you vote for him. (The best politicians are also the best marketers).
- An education institution who tells how attending their institution will further your child’s future earnings ability, so that you pay a hefty tuition fee every year.
- Whenever someone tries to convince you by presenting an opinion or fact, they are marketing to you.
*Rule #1 of marketing: tell your prospective customers HOW they will benefit from your product. Strike greed or fear.
These people aren’t bad people. It’s just that everyone in this world has an agenda. Self-interest is the basis of capitalism. Some people try to dress up self-interest as selflessness by saying “I’m trying to help customers”. If they were truly selfless, they would help customers for free and start a charity. To some extent or another, everyone is self-interested.
Herein lies the problem.
Because everyone has an agenda, everyone will have a bias. For example:
- Trading gurus will try to present their program in a more favorable light, exxagerating how well their strategy “works”
- The media has a persistent bearish bias because bad news sells. Humans are more afraid of losing than winning, which means that we are more susceptible to fear than to greed. So while the media (like any good marketer) will try to trigger your greed or your fears, it is generally more effective for them to trigger your fear. More fear = more pageviews = more ad $$$
Any reasonably intelligent person can make his analysis sound “smart”. It’s simple. Just make it complicated. The vast majority of people cannot differentiate between “complicated and stupid” vs “complicated and actually smart”.
In reality, most “expert” predictions are not much better than a 50/50 coin toss. That’s why following the right experts is crucial. Most people follow the wrong experts, which means that they are better off not following experts at all.
It’s important to take in the right information instead of trying to take in as much information as possible.
For starters, read less news. This sounds counterintuitive, but it’s actually the right thing to do. The media has an incentive to be more pessimistic than optimistic. All of this goes against the simple fact that objective investors should have a bullish bias. Most underperformance comes not from overoptimism, but from overpessimism (i.e. underinvestment).
I have been doing this recently, and it makes my mind clearer. I used to read 5-10 different news websites each day, trying to process an overload of information.
- A lot of the information was a repeat of each other. Time wasted.
- A lot of the news was insignificant, but hyped up by financial media to make it seem like a big deal (more click-worthy). This means that I wasted too much time on small, insignificant factors.
- Your brain has a limit, just like your willpower, your stomach, or your body. If you fill it up with trivial things (e.g. “geopolitical tensions in the South China Sea are bad for stocks), you will not have a lot of room for useful things. You are what you take in. This is true for your body, as it is for your mind. If you eat junk food, your body will turn into junk. If you keep reading bad information, it will poison your mind.
Here’s an example.
I used to read Zerohedge. I knew that Zerohedge is dark and pessimistic, but I thought “maybe I’ll gain 1-2 tidbits of useful information after sorting through a lot of junk on Zerohedge”. My train of thought was “as long as I sort through the junk, I will always come out with 1-2 golden nuggets”.
And yes, there are always 1-2 useful pieces of information from Zerohedge. Even the dumbest people have good ideas from time to time. However, acquiring that information came at a cost. It is impossible to filter through information without letting that information affect you. It’s like trying to hang out with bad friends, and hoping that their behavior won’t rub off on you. (This is why you should be careful of the people you hang around with. If you hang around losers, their negative mentality will rub off on you. If you hang around winners, their positive mentality will also rub off on you.)
As a result of reading Zerohedge each day, I could slowly notice my thoughts becoming more and more pessimistic. The benefit of reading Zerohedge (1-2 useful pieces of information each day) was outweighed by the drawbacks (my mind was being poisoned).
So I stopped.
I no longer receive the benefit of reading Zerohedge, but I am not weighed down by the downsides either.
I now only read CNBC and Bloomberg for the news. No more Wall Street Journal, Barrons, Financial Times, Market Watch, etc.
I know a little less about the world than I used to. But do I really need to know about “geopolitical tensions in the middle east that could cause oil prices to spike”? I don’t think so.
I’ve decreased the amount of signals by a little bit (not a lot), but I’ve vastly decreased the amount of noise. Overall, this results in better decision making.
With the additional time and energy, I can spend it on more useful activities.
Instead of reading more news and trying to guess how the news will impact the market (i.e. discretionary trading), spend more time on learning strategy. Read more. While the media uses clickbait all the time, good books rely on solid content instead of flashy headlines and coverpages. It’s hard to write 60,000 words of clickbait.
Spend time learning about complete end-to-end trading systems. Doing so will help you create a holistic trading strategy. One-time trade setups aren’t very useful, becaues when those trade setups don’t exist at the moment, you won’t know what to do.
Read SSRN, which has a wealth of solid research on trading and investing.
Check the market less. Stop staring at it every few hours. Doing so will calm your mind instead of helping you panic over every 3% move in the market. Did you know that Warren Buffett typically checks stock prices less than once a day? Contrast this with a typical investor, trader, or hedge fund manager who checks his quotes multiple times a day yet can’t even outperform buy and hold over the long run.
More ≠ better results.
Stop listening to the gurus. When reading “Stocks for the Long Run” by Jeremy Siegel, what strikes me the most is how often the gurus are wrong. The gurus of our age are Jeff Gundlach, Ray Dalio, Robert Shiller, etc. The gurus of the past were Bill Gross, Irving Fisher, Roger Lowenstein, Byron Wien, Henry Kaufman. All of these widely followed gurus often made wildly inaccurate predictions about the stock market, especially during the course of a bull market (more often than not they err on the side of being too bearish too early).
The idea of “less is more” applies to other fields, such as entrepreneurship. A good entrepreneur doesn’t spend most of his time saying ‘yes’. He spends most of his time saying ‘no’ to the things that will distract him.
When Steve Jobs was at Apple, he would hold an annual meeting for Apple’s top executives. The executives would come together and brainstorm ideas for the new year. Jobs would write down the Top 10 ideas. Then he would eliminate the bottom 7, leaving only the Top 3. I’m sure that there were some great ideas in the ones that they eliminated. But more often than not, doing less actually helped them more than doing more. Sometimes, less is more because “doing” costs time, effort, and money.
“Less is more” goes against Shiny Object Syndrome. Yes, sometimes chasing the Shiny Object will benefit you. But more often than not, it will hurt you. If you keep chasing the Shiny Object, on balance it’ll do you more harm than good.