"Thirty years ago the best investors had the biggest funnels of information. Today the best investors have the best filters of information. The market is filled with opportunities and opinions. Filter the noise. Find the signal." - Ian Cassel, Founder Micro Cap Club
Client: What happens if all the banks fail?
Me: What have you been reading?
Potential Client: Check out this article (slides over phone). The author is stating the market is going to crash. This confirms my viewpoint that the market is due for a correction.
Me: That person has been wrong for seven years running. What if they continue to be wrong?
Client: Money Magazine says I should own these five stocks in retirement.
Me: You hate stocks, remember?
Client: Oh yeah...
Good people, well-intentioned, but in serious need of an information filter.
30 years ago we didn't need filters because there was only a limited number of information sources (newspapers, magazines). For better or worse, that was flipped upside down by the internet and social media. Today, real-time information is spewed out of a firehouse from all directions. In my opinion, having a reliable process for filtering information is a key attribute for a successful investor, both amateur and professional.
The information we consume day after day influences how we view the world. They say you are what you eat. I believe the same holds true for the information we consume.
It's human nature to seek information that aligns with our point of view. Look no further than the family member we all have that only watches Fox News, or CNN. In investing, the opposite approach is necessary. Sure, we can still read, watch, or listen to those that share our beliefs, but we must also seek out information that challenges our thinking. Here are some questions to consider:
How could I be wrong?
What are the consequences of being wrong?
What does the objective evidence suggest?
Am I behaving rationally?
Do I have other motivations, such as the need to be proven right?
Can I change my mind if evidence disproves my view, or if the facts change?
99.9% of what you see or read via mainstream news is more narrative than actionable information. Most of the time it's a talking-head weaving a story based on his or her narrow experiences. In Gregory Zuckerman's book The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution, Simons' team of mathematicians were testing a new trading strategy. The trade turned out terrible results that moved the financial markets. The team was amused the following day as market experts on TV tried to explain the move.
"Any time you hear financial experts talking about how the market went up because of such and such - remember it's all nonsense." - Medallion Fund Researcher
If you do watch or consume financial media, it's important to acknowledge that most people have an agenda. The bond guy on TV is going to predict doom for stocks and offer a safe alternative in bonds. The annuity guy is going to predict a market crash, and champion the “guarantees” of an annuity. The suit that works for a big bank is going to predict stocks are going higher because they want you to invest with their firm. Consider the source and motivations of the messenger before coming to an absolute conclusion.
I encourage those with a natural disposition to stay balanced. If you err on the side of pessimism, read something more optimistic. If you're convinced the market can only go higher, read something pessimistic.
Finally, ignore people or organizations that predict the same thing year after year. Eventually they will be right, but none of it useful.
Here's a rough outline of my information filters. Your personal filter will look different and that's okay. The point is to have something to block out the noise.
Blogs - Finviz has a great news/blog curation page. I can quickly pursue interesting topics from my favorite bloggers.
Twitter - the Twitter experience is heavily influenced by whom you follow. My feed is a mix of sports, professional investors, researchers, journalists, authors, and motivational speakers.
Koyfin Charts - In my opinion, the best free tool for tracking market action, screening tools, analysis, etc.
Bespoke Investment Group - Pure Portfolios pays for access to Bespoke's independent macro-economic research.
Ycharts - Most of the graphs that appear on our blogs comes from Ycharts. This is also a paid service.
As investors, the information filters we put in place are imperative. No one has time to read everything nor would they want to. By setting up filters, we can cut through the noise and identify what matters.
Shutterstock.com was the source of the cover graphic