One of the great things about having children is that one can keep up on the latest trends and expressions. Years ago, I was introduced to the concept of “TMI” or Too Much Information.
The concept of TMI is not limited to preteens trying to out-cool one another, however.
When it comes to financial markets, the desire to collect and analyze information and data is insatiable. In the past, only the largest financial institutions had the resources and capabilities to handle truly massive amounts of data and information. Now, with the internet wired into our PCs and other devices, the average investor can easily swim in the “data sea”. As our RSS Readers and email inboxes clog with unread messages and articles, we should ask two questions: Why is information so important? And, is there such a thing as too much information?
Why is information so important?
One of the first principles of the Efficient Market Hypothesis is that the current market price of an asset equals the discounted value all available information.
While that statement is designed to point out the futility of trying to outperform the market by reading the newspapers, it has spawned an effort by investors to actually try to gather “all available information” in an attempt to more fully understand the asset prices and thereby gain a marketable edge. Naturally, the effort is doomed to some level of failure. Because it is impossible to gather “all” the information, financial firms endeavor to capture a statistically significant amount of information and data. This still represents a massive amount of information and data that must be organized so that analysts and fund managers can use it to make investment decisions. The sum total of this data collection, crunching and processing is generally marketed to the investing public as the insurmountable barrier to entry that can be surmounted by becoming a client. When financial firms talk about what they sell (whether the buzzword is “mindshare”, “intellectual capital” or whatever), the fruits of their information gathering is front and center.
Can we have too much information?
This question is heresy in most corners of the investment world because so much effort goes into the acquisition of information and that in turn is the core of the value proposition offered to clients. It also violates conventional wisdom because more must be better. The more we know about a situation, the better we will be able to address it. The principle certainly holds in most professions. Doctors are constantly seeking to upgrade their knowledge of the latest developments and procedures.
But the question remains: Do your decisions improve with greater amounts of information? Specifically, will your investment performance improve in proportion to the amount of information you acquire?
Surprisingly, the answer is only up to a point. A number of studies have shown that while a certain amount of information is beneficial to decision making, extra information piled on after that point may add or detract from the decision maker’s conviction but the quality of the decision making actually tends to deteriorate.
The reason is tied to the nature of the information in the financial markets. Unlike medical knowledge, financial information does not have as rigid a framework. The old children’s song about “the hip bone connected to the leg bone” does not have a financial markets equivalent because the connections between the data and the resulting market performance are not as robust as regression analysis would seem to suggest.
What’s an investor to do?
In an effort to help streamline the decision making process, we have initiated a new feature on the Fund King website that will review market resources that we feel represent the critical information that one needs to make good investment decisions.
We call it WebSource and we expect it to serve two purposes.
The first purpose is to highlight sites on the web that we believe can add value to your investment process. We break it into three categories:
- Market data and charts
- Fundamental information and opinion
- Economic outlook
The second purpose is to demonstrate how much useful information is available for free or very low cost. There is a tremendous amount of information out there in cyberspace but that doesn’t mean you have to pay over the odds to access it.
We hope you will find this new feature useful and look forward to your comments.