We live in a noisy world that is getting noisier every day. Faced with an onslaught of information that we are wired to misinterpret, we must develop simple strategies for making sense of it all. A few suggestions include:
Base Camp – Our imperfect memories and insensitivity to base rates means that we are likely to confuse ease of recall with probability. Wherever possible, seek out historical probabilities and rely on them as best guesses for your own course of action. If it takes most people two years to write a book, you’re unlikely to knock one out in three months. If most people should diversify because single stocks are risky – so should you.
Look for the Overlooked - Nassim Nicholas Taleb hilariously relates a story that speaks to how we think about innovation and how our best efforts to be creative can be thwarted by our tendency to overcomplicate things. As Taleb points out, the wheel was created over 6000 years ago, but the wheeled suitcase was not invented until 1970. In fact, humankind even achieved manned space flight (May 5, 1961) before the invention of the wheeled suitcase! Are there simple, elegant solutions that you are overlooking by trying too hard?
Keep it Simple - Just as more information about Linda the bank teller (look up this experiment if you're not familiar!) makes us less capable of judging what really mattered, so much of what passes as investment advice is marketing or clickbait with a thin educational veneer. A part of any sensible approach to security selection is determining what matters most and a focus on those variables to the exclusion of the cacophony all around. True investment signal consistently passes three tests – 1. It is common sensical (i.e., no Bangladeshi butter production) 2. It is research based 3. It endures as a result of a behavioural component.
Check Yourself – One type of information is deserving of extra scrutiny and an added dose of skepticism; information that you are excited to hear. Your excitement about believing something and your incredulity should be inversely proportional to one another.