Information Overload and the Law of Diminishing Returns

Information Overload and the Law of Diminishing Returns

There is a book out there called, “The Investment Checklist” by Michael Shearn. It’s loaded with good information and makes an excellent reference book for investing in the stock market but the basic premise of the book I think is very flawed. The author  literally has 57 items on his checklist he expects the investor to investigate and once you read what’s involved in some of the elements on the list, investigation turns out to be the right word. I don’t view this as being very practical or useful. Peter Lynch once wrote years ago, “the investor should be able to explain his investment idea with a crayon”.

Imagine going through all of Shearn’s 57 items of research only to find out down the road that randomness (pure chance) makes the company a bad investment anyway. Don’t under estimate randomness to have an impact on the performance of your investments.  And if you hold 10 companies in your portfolio, you would have to do all that analysis for each holding. Ridiculous really, count me out. This is an example of extreme left brain thinking. Accumulate as many facts as you can and you will make better investments. Well maybe sometimes and maybe not. There will reach a point in time where additional facts will add very little to your investment thesis and may actually cloud the picture.What we seek as investors is utility of information (the quality or property of being useful) . Once we reach the point of maximum utility of the information that we're basing our investment thesis on we should go no further in our analysis. From that point on the experience you have accumulated in your investing life will be combined with the facts you have unearthed about the company and your right brain will take over and synthesis the information. You get a "feeling" about this stock.

I wonder if the reader is suffering from information overload right now while reading this. Maybe we both are already suffering from the law of diminishing returns...Just kidding...I think...but you get the idea.