Sunday, August 22, 2010

Can Information Overload Lead to Investment Underperformance?

As the regular readers of this blog learned, Ruth and I spent last weekend in the Berkshires attending concerts at Tanglewood. We were accompanied on our visit with two Blackberries, a laptop computer and an iPad. The psychologists will recognize that we are paranoid about missing information. In the weekend Wall Street Journal, Peggy Noonan assures me that “Information Overload Is Nothing New.” She refers to the recently published book, Hamlet's BlackBerry by William Powers, where he quotes letters from the famous ancient Roman senator Seneca. At the time of his writings many within Rome were anxiously awaiting letters from others, both within the imperial city as well as the rest of the global Roman Empire. In Seneca’s mind, too many Romans were becoming dependent on this source of information. Seneca wrote about “The danger of allowing others - not just friends and colleagues but the masses - to exert too much influence on one’s thinking.” He was asked what was important to avoid, his answer was “…a mass crowd.” “It is something to which you cannot entrust yourself without risk…” These thoughtful words from the past place an extra heavy burden on us with our portable communication appendages.


What drives me to always seek more information? I am fearful that hiding in plain sight is the single key that would open up the future, particularly the financial future. I should relax and remember much from my second great educational institution, the US Marine Corps. (The first was the New York race tracks.) In planning for operations against an enemy, I was introduced by the USMC to the concept of the essential elements of information. We were to focus on those elements of information that were needed for us to be successful; separating a kernel of corn from grains of sand, etc. In viewing the information, one needed to ascribe some qualitative judgments to each element of information. One needed to distinguish what was believable from what was credible. One of the key determinants was not what the enemy will be do, but what he could do. (I now recognize that this kind of thinking would have identified a potential “Black Swan” long before the Australian example showed up. Or the potential for more extreme “fat tails” rather than much more normal bell shaped curve distributions.)

Beyond analyzing the capabilities of the enemy forces, we were taught to look for the limitations on these capabilities. Often this meant estimating how much ammunition the enemy had on hand and how quickly he could be resupplied, and by what means. The next step was to guess as to what were the probabilities. On a chalk board every attack and every defense showed various units in some pre-determined order. In reality once a battle is commenced the balanced attack or defense becomes unbalanced, and now we begin the “real plan,” which the historians will credit the win or loss under the title of “Plan B or C or D.”

Markets and prices do not move in a continuous straight line and many imponderables surface to ruin formal investment programs. One of the key ingredients to a successful plan is an understanding of the personality of the leader on the opposite side. Robert E. Lee displayed this knowledge better than any other American general. In a market dominated by a relative small number of institutional investors (be they mutual funds, hedge funds, pension plans or foundations), and with individual investors following various pundits, it will be these few personalities that will translate the various inputs into quite different transactions.

In applying filters to the information overload, I use Seneca’s fear of thoughts from the masses. The way I do this is to make a judgment as to whether the current fears and expectations of “what everybody knows” is already incorporated into today’s prices. Every now and then the general prescription as to the future is correct, but not often. Further, when the public is correct, the movement in prices is often quite limited as most people have already acted upon the various fear and greed elements. On the basis of this type of analysis, I will make three short term bets. The first is that the US will not experience a “double dip” in the economy. Second, in the short run, emerging markets investment will not do better than those in the US. Third, some European investments will be surprisingly good in the short term.

Turning to the task of trying to find valuable insights from public source information that others do not see due to their information overload, I value highly the following two inputs. In our local paper, the Newark Star-Ledger, there was a Bloomberg story focusing on the number of jobs lost in New Jersey (21,200) and North Carolina (29,800) as thirteen states showed declines in payroll. Buried within the article was the statement that payrolls increased in 37 states. The leader, finally, was Michigan due to increased auto production. Nevertheless, in 74% of our states, more people are working. Another bullish indicator in the news was that Mort Zuckerman’s Boston Properties is making a large bet on Manhattan real estate, buying an empty office tower on Madison Avenue. Zuckerman also owns the New York Daily News. While not all of his investments have worked out, he has a good track record. For his investment on Madison to succeed not only must New York City thrive, but so must the bulk of the country and many others as well.

I guess I can not emotionally get out from under my information overload, but I can revert back to my Marine Corps training and seek only those essential elements of information to aid in my investments for others and myself.

What are your own essential elements of information?
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