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“Too Much Information”

October 28, 2006
Eric Houssels

Eric Houssels

3 followers

“Too Much Information”

Edward Hallowell, M.D., in his book Crazy Busy, coined the term “Gigaguilt” to express a modern infliction all too common in the investment community. Investors face ubiquitous assailings of information stimulation all the conscious seconds of our days. Importantly, we can begin to feel as if it is necessary to absorb and make use and sense of it all, in fear that if we do not, we may be missing out on something. This is the Gigaguilt – a guilty fear of not digesting and mastering all the e-information available to us. It is quite obvious that this is an irrational guilt and, were it to gain influence, a dangerous one. There is simply too much out there and, fortunately, most of it does not really even matter for longer-run thinkers. I am seeking to better understand this phenomenon; below is what I have arrived at to date for the particular case of information affecting a stock price and how best to deal with it as a long-term business owner.

I have identified two structural advantages that smaller, long-term oriented investors like myself possess:

  1. Small size: we can be nimble with buys and sells (i.e. make very little market impact when it comes to execution) and can invest in small companies meaningfully.
  2. Long-term orientation: we have significantly less pressure to deliver quickly, allowing us to own good companies facing temporary, improvable problems

The problem with “too much information” is that it severely threatens this second advantage. Information flow, which the vast majority of the time could be classified as meaningless noise, and the subsequent stock price moves that result, produce emotional reactions ranging from self-congratulations to fearful doubt.

Stock down
 
Stock up
I------------------- ------------------- ---------------I----------- ---------------------- ---------------I
Worry and fear defiance complacency pleasantness self-congratulations

These resultant emotions are very dangerous. They will cloud thinking (the most important of which is the focus on the “big picture” part of the thesis), causing unnecessary and often unwise friction, or even preventing necessary friction from occurring. Such emotions threaten the seizure of opportunity in less poisonous cases and the downright destruction of capital in the more extreme ones.

It is the big picture part of the thesis that matters. Why are we an owner? And the answer is usually quite simple, readily believable, and easily expressable within 30 seconds. Information that speaks to these 30 seconds matters; anything else simply does not.

Most of us will not have an informational edge over our opponent investors; I choose not to play this game. Instead, I seek to have a “pain” edge. Whereas they cannot stand even slight pain, I, provided it is in the service of longer-term gain, can. Those of us utilizing the second advantage expressed at the outset of this note must use this pain edge. Continue to focus on the big picture thesis, the long-term prospects of the business and its valuation.

For those businesses that may not be as sturdy as your classic Warren Buffett company, I extend the above by saying – just know why you are there and be honest with yourself as new information comes to bear. If the thesis is broke (and these companies tend to have more breakable theses), do not hope. Reevaluate because prices do matter (assuming a drop) but do not hope.

Too much information stirs up the hornet’s nest. Know what you are doing with each stock and only question this “what”; do not worry about all the other noise if this “what” is undisturbed. And then allow the market to serve you (which often means averaging down), not guide you into the short-term gratification of the relief of pain or the capture of pleasure.

 

 

About the author:

Eric Houssels
GuruFocus - Stock Picks and Market Insight of Gurus

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