This is the second in a series of Money and Market columns where I’ll share with you the five essential building blocks required to successfully earn enduring gains in your portfolio.
As you’ll recall from last week, the first building block that all successful investors must have to grow their next egg is a Better Investment Model. This means kicking the concept of luck to the curb and fine-tuning your investment process so you can confidently apply it to any future investments you make.
With a time-tested model in hand that you can trust and easily implement, you are well-on-your-way to the second building block …
Obtaining Superior Information
Now, this is not to be confused with more information.
Just because you are bombarded with facts, stats and commentary from TV reports, newspapers, and thousands of Web sites, doesn’t mean the quality is as assured as the abundance.
At a conference for information system executives, it was said that “90 percent of the data that exists today was created in the last two years.” Even if this quote is a wild, back-of-the-envelope guesstimate, as I suspect it is, the essence of what it says is pointing in the direction of the truth.
|Today’s investors often suffer from information overload.|
Many inexperienced investors mistakenly believe more information provides more clarity and improves their decision-making. But in reality, additional information often just serves to confuse the decision-making process.
In fact, the best investors know that the incremental knowledge gained can actually decrease with each additional piece of information added.
Focus on the Facts and Stats that Matter
James Montier, a partner in the well-respected global investment firm GMO, says it this way in his book Value Investing:
“Often in the investment business, which has an obsession with minutiae, 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 ourselves what we actually need to know!”
So when making investment decisions, more information is not necessarily better. Information that helps you determine the potential return from an investment is all you need. Nothing else is relevant. This allows you to disregard the vast ocean of market data and economic commentary that is of little or no investment value.
It’s essential to stay focused because …
Our Ability to Process Information
Is often Imperfect
George Miller — one of the most notable psychologists of the 20th century — found that the average human’s conscious memory can only handle just seven bits of information, plus or minus two. His article, The Magic Number Seven, Plus or Minus Two, was first published by the American Psychological Association in 1956. And several subsequent findings have verified his findings.
But long before scientists such as Miller performed their studies, Sir Arthur Conan Doyle had the ever-insightful Sherlock Holmes explain to his readers (emphasis mine):
“I consider that a man’s brain originally is like an empty attic, and he gets to stock it with the furniture of his choice.
“A fool takes in all the lumber of every sort that he comes across, so that the knowledge which might be useful to him gets crowded out or, at best, is jumbled up with a lot of other things, so that he has difficulty laying his hands on it. But the skillful workman is very careful indeed as to what he takes into his brain-attic.
“He will have nothing but the tools which may help him in doing his work, but of these he has a large assortment, and all in all in the most perfect order. He knows there will come a time when, for every addition of knowledge, you forget something you knew before.
“It is of the highest importance, therefore, not to have useless facts elbowing out the useful ones.”
This is precisely the reason professional investors and analysts, recognizing that their perception of information can often be skewed, use a disciplined, systematic approach (consistently applied) to focus their attention on information that is relevant to the investment process so they don’t miss something important.
An Example Using Superior Information
As an example of an investment that uses the Superior Information approach to earn superior investment returns, consider the Tweedy Browne Global Value Fund (TBGVX).
For years, Tweedy Browne provided brokerage services to the great investor, Warren Buffett. Today, its lead portfolio managers, William Browne and Bob Wyckoff, are seasoned experts at picking through the wreckage overseas to find the gems.
Tweedy Browne’s unique knack for uncovering information other investors can’t seem to find is the reason this highly regarded fund carries Morningstar’s five-star ranking. TBGVX has rewarded it’s investors with a return of almost 20 percent over the past year and its three-year return is 100 percent above its benchmark.
Despite its very low turnover, Money magazine reports that TBGVX has ranked in the top 2 percent of its peers over the past five years. Because of its expertise in acquiring stocks from desperate sellers and holding onto them before reselling at substantially higher prices, Tweedy Browne has earned the affectionate nick-name “the Pawnbroker of Wall Street.”
The Point is … Less is More
Focus on the facts and stats that matter and don’t get lost in the useless details. And even after you focus on the facts and stats that matter, double check them because you will miss something the first time through.
Unfortunately, the facts and stats that matter are constantly changing so there is no 1, 2, 3 easy recipe.
Right now, it’s liquidity and interest rates. A couple of months from now, it could be corporate earnings and inflation.
But if you can clear away the clutter, you’re at least 80 percent of the way there.
Next week, I’ll explain how Building Block #3, Controlling Risk, can limit your losses and improve your returns so you can rest comfortably and grow your portfolio at the same time.