“Information is not Knowledge” Albert Einstein
We live in an age where more and more information is available to us. Don’t get me wrong, I love having easy access to information. In Benjamin Graham’s day analysts would have to sift through annual accounts to painstakingly extract the information they needed. How much easier to get what you need from Bloomberg or Yahoo Finance at the touch of a button.
However with such a wealth of information and with such easy access to it there is a temptation to capture more information than we need. This can actually be dangerous. Why? Because we end up getting drowned in information – we lose sight of what is important and why we are looking at it.
Wall Street Loves Information
As investors and analysts we often feel empowered by more information. As we gather that information we erroneously believe that our understanding is growing. Nowhere is this more true than on Wall Street, where I have seen analysts create excel spreadsheets of obscene proportions, sometimes with over 50 tabs for a single company. These analysts are, for the most part, very intelligent individuals but they have lost sight of what truly drives the business (which in most cases can be captured in one page). When reality doesn’t match their models, these analysts have an anxiety attack and scurry back to their spreadsheet until they can make sense of the world again.
Shorter and Shorter
Tied up with the desire for more information is the increasing focus on short-term information. Data hungry analysts pour over each quarterly result dissecting them every way they can. Come the conference call, analysts then push for even more information – more granularity to feed their models. Small divergences from expectations take on disproportionate importance and analysts use their platform to yell about it aggressively.
Knowledge not Information
Don’t listen to Wall Street. Ask yourself in the first place if you understand what the business does and what the key drivers of its profits are. I am always astonished at how many analysts and investors have not thought about these basic questions. This is not information that you will get from Wall Street research (the topic is far too mundane for them) so you will probably need to do it yourself. Warren Buffett wrote “The truly big investment idea can usually be explained in a short paragraph. We like a business with enduring competitive advantages that is run by able and owner-oriented people. When these attributes exist, and when we can make purchases at sensible prices, it is hard to go wrong”.
“To bankrupt a fool, give him information” Nassim Nicholas Taleb
We all need information to make decisions. By all means use the tools available to get data in an efficient way. But information for its own sake means nothing unless you are using it to further your own understanding.