In one of the articles I wrote previously (although I'm sure I wrote about it, unfortunately I couldn’t remember which one), I mentioned the following checklist against biases in Poor Charlie’s Almanac:
- Look for disconfirming evidence – killing your own ideas
- Emphasize factors that don’t produce lots of easily available numbers
- Under-weigh extra vivid experience and overweigh less vivid experience. Same with recent events, i.e cool off
- Remember the lesson: An idea or a fact is not worth more merely because it is easily available to you
- There’s no logical answer in some cases except to wring the money out and go elsewhere
While revisiting this simple yet powerful checklist, I realized that the idea of under-weighing easily available information was mentioned twice.
- Emphasize factors that don’t produce lots of easily available numbers, and
- An idea or a fact is not worth more merely because it is easily available to you
This also reminds me of a habit Howard Marks (Trades, Portfolio)’ son Andrew Marks cultivated with the inspiration from Howard: Whenever someone provides Andrew with some information related to an investment, the first question Andrew asks is “and who doesn’t know that?”
This is a great question to ask as it forces you to think on another level. Most easily available information is first level information, which is unhelpful and can even be misleading. Unfortunately easily available information is very often extra-vivid, which causes our brain to further over-weigh them. This explains why most of the investment arguments are not value-adding as they are a compilation of easily available and vivid information.
The oil and media sell-off offers a fertile ground of investors getting clobbered based on easily available and extra-vivid information. Here are some examples:
- A CNBC article with a headline about $20 oil
- Another article in which T. Boone Pickens projected $70 oil by year-end
- Barron’s article on why it is a good time to buy Disney
The price of oil or natural gas, especially in the short term and medium term, is unpredictable and unknowable in my opinion. But the endorsement from a legendary energy investor served as a validity-booster for those who read that article. It’s easily available and it’s vivid, but it’s also first level information. Those who acted upon this information alone are subject to great subconscious false confirmation, and once you acted upon it, you are then subject to commitment and consistency.
The article on Disney is also eye-catching, which is the nature of journalism. But as investors, we should be skeptical of the conclusions reached by a financial journalist. All the numbers used in the article are public information, which wouldn’t take more than one minute to find. The projection of $8 EPS and $160 Disney stock price has no evidence backing them up whatsoever. But they are easily available and vivid. Combine them with deprival super-reaction, it’s not hard to understand why it's tempting to buy the stock on the news.
The correct but incredibly painful action, in my opinion, is to under-weigh all the numbers from the aforementioned articles as your first and automatic step. Then you should actively seek second level and third level information, which is not easily available at best and sometimes almost impossible to find at worst.
For instance, if you dismiss the concern of cord-cutting, you should find out the following:
- How much is ESPN’s per sub per month affiliate fee? What is the history of the per sub per month affiliate fee, and how much it will be in the next few years?
- How many subscribers does ESPN have, and what happens if the cord-cutting continuous at the current rate?
- Given your answer to question and 1 and 2, what’s the impact on Disney’s earnings if in 2016, another 2 million subscribers left ESPN? How is that different from a 1 million subscriber loss?
- How about the other non-ESPN networks?
- What happens to advertising revenue if cord-cutting accelerates?
If you actually try to find the answers for those questions, you will notice that each successive question represents another level of difficulty and another level of unavailability. But if you do find the answers, you will then be able to figure out why Bob Iger changed the guidance from high-single-digit to mid-single-digit, and you would also be able to understand the media sell-off better.
I offer this exercise not to inform but to remind. Believe me, I used to fall into this availability and vivid information trap all the time. The way I handle this is to step on the shoulders of the giants and shameless copy their method; I have a checklist item that deals with easily available information. If the numbers are easily available, I simply put almost zero weight on them.
I’ll end this discussion with another reminder – it takes exponentially more time to find and integrate information not easily available, by definition.