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« Getting Lucky | Main | Why you are not always a great leader »

Investment and life

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Too much info, too much fear.

Got enough information? There’s plenty available. Search any idea and you’ll be overwhelmed in seconds. Little will be relevant; a lot will be rubbish.

It’s dangerous stuff.

Decades ago MIT professor, Paul Andreassen, asked two groups to trade an identical investment portfolio. One got minimal information, the other had loads of it. The former easily outperformed the well-informed latter. Information overload can curb performance.

A parallel to internet overload was the arrival of the MRI in the mid-eighties. It was ten years before the medical profession realised the surge in information on lower back pain led to unnecessary surgery. One study in the New England Journal of Medicine found fifty percent of a sample group who simply took bed rest recovered as well or better than those who went under the knife.

This applies to investment and life.

When we focus on too much stuff, we lose perspective on the broader picture, sweating the small stuff to our cost. We can go better when we step back and observe rather than stress about minor issues.

There’s an investment parallel there to. It turns out that constantly checking on individual stock prices has a high correlation with lousy returns. It takes your eye off the more profitable long view.

Here’s another investment axiom. Picking great individual stocks generates only a very small percentage of success. On average, ninety percent of returns come from choosing the right market and the right sector. The right stock has little to do with it, yet that’s where investors put most of their effort.

It applies to business strategies. Get the big things right and your chance of success will rise.

It also gives perspective on another problem: fear. Research on loss aversion shows we are disproportionately upset by losses compared to how we feel about gains.

Nobel Laureate, Daniel Kahneman, attributes that to evolution. “Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.”

Because taking a loss is emotionally more challenging than enjoying a win, people sell their winning stocks too soon, and hang on to their losers too long.

The same in business. Kahneman again: “businesses that are losing ground to a superior technology waste their remaining assets in futile attempts to catch up.”

At a personal level too, we are pained by our weaknesses, often ignoring our strengths. Yet spending huge amounts of time trying to correct our shortcomings yields a relatively modest result compared with the surge in performance we can achieve by concentrating on our strengths. We are better off just accepting who we are.

What can we do?

Get our eye off the minutiae and take a wiser, broader view. What are the things that really matter? That’s what I’m doing over the next few weeks. This is my last newsletter for this year. I’m dropping the small stuff for a while and replacing it with rest, and maybe some contemplation.

Thank you everyone – clients, readers, friends and family – for your support in 2013. It’s been a hectic one for me. I’m hoping to return in 2014 in a more relaxed state and, with luck, a broader perspective. Enjoy the break.


Reader Comments (3)

Top article Alan. You have a good break too.

December 10, 2013 | Unregistered CommenterVanillaCafe

the problem with drilling down is that you often do it on your own. I often need extra info to get me out of my own head.

December 10, 2013 | Unregistered CommenterRobyn S

That would explain my lousy investment performance! Been wondering what it was. My biggest problem is dinner party stock tips. They sound good over dinner, then I watch them closely as the gradually halve.

December 10, 2013 | Unregistered CommenterMichael Zybrinski

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