Back                            Information doesn't equal knowledge

Consistently successful investors work hard at accumulating and managing knowledge. They know that knowledge helps create understanding and is a critical prerequisite of good decision making.  Knowledge comes from information but it has to be the right information. 

Quantity does not mean quality

We live in what has been called the 'information age' and since people need information to accumulate knowledge you'd thing it would also mean that we live in the 'abundance of knowledge' age.  Well the evidence, and recent events, seems to indicate that as our access to information has increased there has not been an accompanying increase in knowledge.  This is because not all information leads to knowledge, in fact it's the quality of the information not it's quantity that matters. 

But thanks to the Internet, 24 hr TV and increasing legal requirements there is no shortage of information on just about anything you want to name.  We get mountains of the stuff and most of it can be accessed cheaply and quickly. I base all my investment decisions on publicly available information for which I pay virtually nothing. But for information to lead to knowledge it has to have quality. For example, the cash flow statement shows how much cash a company receives and spends in a year. It tells you everything you need to know about whether or not that company will be able to pay its bills or your dividend and yet it is a small part of the overall financial accounts. 

However every time a company, stockbroker or investment fund goes broke out trot the usual suspects (politicians, shareholder activists and academics) moaning that investors didn't have enough information. This is followed swiftly by a demand for more disclosure and regulation. Thanks to this quantity over quality approach we now have reached the point that we are now bombarded with huge amounts of legalese based jargon in fine print. The objective now is to avoid legal action rather than conveying clear relevant and useful information that leads to sensible decision making. 

You have to read it

Increasing the volume of information has some unintended consequences. For instance, when you look into some of these corporate collapses that have fuelled the expansion of disclosure you find that the companies already told people what was happening anyway.  One of the most spectacular corporate collapses in the US in recent times was Enron. This massive company was one of America's largest and a darling of the sharemarket. When the company collapsed taking a huge amount of people's savings with it there was the usual chorus of condemnation and accusations of poor disclosure. However all the information that people needed to know that the company was massively in debt and operating on a wing and a prayer was in the accounts. Most analysts didn't bother to read them or just believed what the company told them.

The same can be said about Australians who often don't read contracts they sign or if they do acknowledge that they don't understand them but go ahead anyway. Many of the clients in margin lending specialist brokers like Opes Prime and Lift Capital shouldn't have been all that shocked when they discovered that they didn't actually own the shares they thought they had bought through these brokers.  When you borrow money to buy shares those shares are collateral in the same way your house is collateral against your mortgage.  But even if for some reason you didn't understand this fact when you went to Opes you could have found it out if you had read the fine print.

I can make these comments because I have behaved this way myself. One of my investment mistakes resulted in the loss of almost all of my investment. I lost $16,000 as my 'sure fire' gold miner went into administration. Of course I was shocked at the 'sudden' demise of this promising miner in the middle of a boom in the price of gold but looking back over the information they sent me I could see that it was obvious they were in trouble about 12 months prior to their collapse.

Information used as entertainment

I hope I don't shock you when I tell you that the media is not in the business of helping you to make excellent decisions by increasing your level of knowledge. The media is in the entertainment business. They want to provoke an emotional response which is why terms like crisis, meltdown and disaster are over used. Firing up your emotions may be great when the discussion is about poverty or crime but it is the last thing you want when it comes to investing. Good investing comes from decisions made in a calm, logical and thoughtful way. You want quality analysis not sensational headlines but sensation is what you get even from so called respected business journalists.

The media will always exaggerate the negatives of any situation and try to create an air of crisis. That's why normal business cycles are presented as something to be feared rather than managed and why a couple of stupid business decisions suddenly become a systemic failure by management. Aside from deliberately not keeping things in perspective the media spends a lot of time reporting the trivial or extremely short term information.  It is very common to see, even from otherwise sensible broadcasters like the ABC, journalists and other economic pundits trying to explain why a share worth say $4.00 fell by 2 cents on any particular day. This sort of thing seems to happen with companies like Telstra. This type of price movement is not particularly relevant to the overall health of the company and is usually just market noise. It is usually not something that requires action on your part.

Filter out the meaningless

To improve the information you receive I recommend you do a couple of things.

One reduce the sheer volume of information you receive. Secondly apply a quality test. This may seem harsh but I hardly watch the news anymore and when I do I treat it as 'entertainment'. I imagine it as a soap opera or a drama with a huge cast. I have also stopped reading the financial and other press. My girlfriend buys the paper once a week for the TV guide and if I do glance at it I put it in the same category as those gossip magazines they sell at supermarket checkouts.

Be critical of anything you hear or read. Ask yourself questions like:

Who is the source and what do they get out of passing on the information? Remember news is about selling newspapers or increasing the TV ratings;

If a claim is being made is it backed up with evidence? Be wary of any arguments starting with statements like 'everyone knows that ....';

If a sales pitch is being made check to see if all possibilities are being covered. For example Margin loans sales pitches usually only deal with situations where a share price is rising. However they are very destructive of your wealth if share prices fall especially if this fall is sudden and/ or fast.

Learn from the masters

This applies to any area of your life. If you want to become good at something find out what the successful people in that area are thinking and doing.  Since I want to improve my knowledge of investing I read books by or about those investors I admire. I have put together a reading list on the site (click here) and will add to it over time. I like to read about all successful investors but the ones I get the most out of, and respect the most, are those who believe in passing on knowledge to others. As an example, the richest man in the world from sharemarket investing Warren Buffett has always been very open about how he approaches investing.