Information overload in investing begins with our pursue to know everything, because we are created in the Image of God.
How much information do we need before jumping into a buy or sell conclusion? Suppose we are going to assess investing in Apple (NYSE: AAPL), what things do we need to know? In this article, we try to address that problem.
Information Overload in Investing: In This Issue
Here we go
Curiosity by Nature: Example of Information Overload
Before investing in Apple, you make a small research.
You need to make expectations of how much Apple could generate in the upcoming years. So you make a comparison between the products: iPhone, Galaxy Series, and Mi-phone. The revenue is going up and up without any sign of a slowdown, but you feel that you can’t rely on single data only.
Then you download its annual report, track its sale, and find that increasing revenue is due to increasing price, not its volume. At this point, you begin to doubt its prospect. Then you try to googling anything about Apple to ensure your analysis, to get a more valid point.
In the discoveries of every click, you find bad aspects and good aspects. Steve Job has gone, volume sales tumble, Samsung and Huawei dominate market share. You begin to question its future.
Then you dive deeper
Get benefit from its ecosystem, Apple service has grown remarkably. The iPhone gets more and more expensive. You assess that Apple will become a Tiffany-like business. They don’t sell technology, they sell luxury. To confirm your bias, you search for an expert opinion. Expert A says A, expert C says C.
You search and keep searching till your chrome tab begin to soak all your laps resources
And you collecting more information. Until you become an Apple expert, even know more than most die-hard Apple fanboys.
What if another brand (Samsung, Huawei, and friends) replicate the same strategy? From this point, the journey to gather information for Apple’s counterpart begins.
When does this seeking come to end? How deep do we need to dive before we lost in our search?
Infobesity: Why is Information Overload a Problem?
Information overload in investing actually rooted in our survival instinct.
Our hunger for information is wired since the beginning. Once at the time, Homo Sapiens is food gatherers, when they get information about food, they feel have an advantage over the others. Hundreds of years later, people were hungry about the new gossip about Elizabeth Olsen. Having knowledge make us proud, safe, up to date, look smart, and young.
That hunger is also related to uncertainty. Because our ancestors didn’t know whether how long they could access the food, gaining more and more information is crucial. In investing, we don’t know how the market will move, so we collect much information – we try to cover our blindspot.
So, here is the problem. Uncertainty makes us uncomfortable, and we overcome that issue with get more data that is beyond our interpretation capability. Here is how decision-making becomes not optimal.
Due to our limited capacity, we aren’t capable to handle too much information. As a result, this distorts our decision-making quality.
To get more about this topic, the reader could access the impact of information overload in other fields here.
Fight Back Infobesity: Margin of Safety
You will be surprised by how everything is connected.
The first thing is we have to unlearn. Investing isn’t like math which everything exists in certainty. Uncertainty exists and we don’t know the future. So long the economist warns the impact of QE on economics, but COVID 19 interrupted then we learn that shake hand could bring the death. We simply don’t know the future.
All we can do is protect the risk, protecting the downside. This is the concept of margin of safety. Remember rule number 1? Never lose your money. So, instead of trying to be precise which is impossible, our task actually much simpler: calculating the worst, is the current price give us protection against that risk?
This is the mental model that Charlie Munger uses. He never tries to be smart, he just avoids stupidity. Munger doesn’t chase the trend, EV boom, or battery euphoria, he missed the dot-com bubble, he missed technology boom, he will miss another one in the future – he just tries to protect his capital – the one and only rule in the financial world.
Back to our Apple’s case. Using Munger’s mental model, what worst thing could happen? If Apple keeps losing market share, how could it survive? Does the current market cap give us enough protection against the downside? Think about the downside of Apple, then let the market do the rest.
Fight Back Information Overload in Investing: Organizing Information
Information comes at random. To keep relevant with the decision making, try to make priority about that information.
I take care of the downside, I calculate the risk.
The top priority is surely economic moat or business advantage. Does Apple have a sustainable competitive advantage that can protect its market share for upcoming years? In the early years of the smartphone era, the Apple ecosystem is unparallel. You can work seamlessly through all Apple devices, but today, that advantage is common.
What about intangible? That Apple logo has a large fan base. It is like Ferrari or Lamborghini, or Rolex. So I will say that the mojo will protect Apple in the phone maker battle royal. So I will make a model that the earning growth of Apple is just moderate or even no growth, very pessimistic but it is always better to become more conservative.
Then I assess the management. Is management take care of its shareholder? Apple pays a dividend and does a massive buyback. Good things. Still, it has a “high but acceptable” stock bonus issue.
I go to its financial statement. Examining its cash flow, with the current rate of buyback and dividend payment, could Apple keep its “jet set” lifestyle for its shareholder. Jet set because actually, Apple cash outflow outpaces its inflow.
Now, given its current market cap, does it give protection? If I buy a little bit expensive, its competitive advantage still has power as protection.
This is how priority is made. It is subjective, but it is organized. This is the hierarchy.
- Industry Characteristic: Not all industry created equal, there is a loser like an airplane and oil industry, there is a winner industry like asset management or medical services. Once we get right about the industry, we don’t need a wide margin of safety, even when our financial analysis wrong, we are in the winning group.
- Management. It is useless when you have excellent business, generating money, but the management loots it. Choose your best.
- Financial. You have chosen the winning industry, the kind manager, now try to pick the best company which has good or even outstanding financial performance, whether its strong balance sheet, massive cash flow, or earnings growth.
Make a pyramid. It is like getting your body goals. Diet is about 70%, this is the bottom of the pyramid, then you have a workout. At the top, you have sleep, mood, etc. Make a priority, hierarchy, pyramid, this will help you swim across the ocean of data without getting sink.
So, to recap all of our lessons:
- We live in the ocean of data, getting more and more information leads us to inefficient decision-making.
- No indicator, No valuation ratio, no analysis, no estimation could precisely peek the future event. Our task is simpler, protect against upcoming uncertainty.
- Information overload could be tackled by information organization. Making a priority of information will help us cope with massive data and news.