Stock Shastra #16: Information, like antibiotics, works best when consumed in the right dosage

The biggest challenge for anyone with a day job and wanting to invest in stocks directly is lack of time. The chief culprit that makes retail investors feel they have lost even before they begin is the large and ever-changing amount of information. It is believed that you need to be on top of this ever-changing, mountain of information before you take stock investing decisions. But is this really true?

At first it seems obvious, the more information we have, the better our decisions. Seems irrefutable? But what proof do we have to support this theory? Luckily, a study was conducted to separate fact from fiction. Read this very carefully:

  1. Eight experienced bookmakers (bookies) were shown a list of 88 parameters available about a racehorse and its past performance (like number of previous wins, performance in different conditions etc.) and asked to rank them in the order of importance
  2. The bookmakers were then given the data of 45 past races and asked to rank the top 5 horses in each race considering these parameters. But the information to each bookmaker was given in various doses of 5, 10, 20 & 40 parameters. Thus, each bookmaker predicted the outcome of each race 4 times – first using the top 5 parameters (as ranked by him), then with 10 and so on. The bookmakers were also asked to give a confidence rating for each of their decisions.

So, what were the findings? The bookmakers were as accurate with 5 pieces of information as they were with 40 pieces of information, i.e. the accuracy of prediction did not rise with increasing information! And the most revealing finding of the study was that while their accuracy did not increase, the bookmaker’s confidence about their prediction increased almost two-fold!

It is this need to feel more confident that is the root cause for wanting more and more information. The end result is we wrongly believe that more information means we will be more accurate. To correct this bias, we give you StockShastra #16: Information, like antibiotics, works best when consumed in the right dosage

To get rid of an infection you need to take the recommended dosage of the antibiotic. When you take less, you are not fully cured and run the risk of falling sick again. When you take more it does not work better, but is harmful to the body because of its side-effects.

Information is like an antibiotic. If we have less than adequate information for taking a decision, chances are we will be wrong. And if we consume more information than required, just to build our confidence, we run the risk of getting confused and distracted by the excess information and end up making mistakes.

Apart from this, information overload creates two more problems:

1) Tone of the information influences our decisions:

When we receive any information in the form of a story we are driven by the way the story is told. Stories usually have emotional content which appeals to us and we accept the story/conclusions without scrutinizing the facts closely. So, the more stories we hear, higher the risk of getting carried away!

2) Not all information is reliable:

This is where stock investing gets really complicated. It is very difficult to decipher reliable, unbiased information from biased information. When the stakes are high, as they are for various players, the motives for spreading a particular point of view is likely to be based on self interest rather than viewers’ interest. And when the media believes in advising rather than informing, the game only gets murkier. No wonder, some gurus recommend never listening to any business media!

So, how do we get the right information in the right amount?

1) Make a simple check-list of information required, based on a robust method:

Before we start looking for information about a company, we have to decide our basis, our criteria for making investment decisions i.e. our method. To apply this method, make a checklist of the necessary bits of information that you require. Searching for information without this checklist is a terrible waste of time. It’s like going to a gigantic store, without a shopping list hoping to explore and come back with exactly what you need. It never works. You invariably end up buying the things you don’t need.

If you have a method that works for you, good; go ahead and make your information checklist. We at have one such robust method which is based on fundamental principles of value investing. It requires identifying a fundamentally sound company and it’s intrinsic worth i.e. MRP. Towards this, we provide a 10 year financial track record for every listed company, in an easy to understand form and information on its future prospects. We also provide the MRP through a price calculator, for every company worth investing in, thus helping you to take the correct decision.

To know more on what financial parameters will help you identify a fundamentally sound company, please read Stock Shastra #3

2) Get Data from a reliable Source:

Today, the sources of data are aplenty, especially when it comes to investing. You have emails, online news, magazines, newspapers and of course the TV with its various channels; everyone not necessarily saying the same story. As we have already said, not all information is reliable and that’s why it becomes all the more important to get your data from a reliable source.

3) Consistency is the Key:

Once you decide on the method that works for you, it is also important that you look at the information in a particular way, consistently. Like with a super store, the more you visit the same one, it becomes easier for you the find the things you want in a much lesser time.

Also, analyzing the same data across companies will make you sharper at seeing patterns and soon you will draw much more from the same data than you will ever get by increasing the amount of data.

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2 Responses to “Stock Shastra #16: Information, like antibiotics, works best when consumed in the right dosage”

  1. Wonderful


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