I have been reading the updated sixth edition of Security Analysis from cover to cover and on more than one occasion, I have stopped to consider the major advantages modern day investors have compared to Graham and Dodd. Investors today have access to a wealth of information that Benjamin Graham lacked during his career. However, more widespread information also would theoretically lead to more market efficiency and reduce opportunities to find mispriced securities. Is it true that the market is more efficient due to the widespread dissemination of information made possible by the Internet and other technologies that have emerged in recent years?
If one considers the sources of information available to investors operating fifty years ago, it is obvious that there were many more hurdles standing between an investor and the knowledge required to make intelligent investment commitments. In fact, the situation was not all that different even 15 to 20 years ago before widespread access to the Internet. I remember spending hours in the library researching publications on microfiche, using card catalogs to find books, and sending out for annual reports when I first started to develop an interest in investing. This was not fifty years ago, but during the early 1990s.
The Information Revolution of the Past Fifteen Years
The world has changed in many ways over the past fifteen years and today it takes only seconds to pull up information on a prospective investment. There is no need to order annual reports from a company given that the SEC maintains all relevant filings online in real time. Competitive research can be conducted online using sources that in the past would require a trip to the library. Entirely new sources of information such as blogs, online newspapers, and discussions boards exists that can provide better and more complete information.
The problem with this wealth of information is that it can quickly overload even the most diligent analyst. It seems that there is never enough time in the day to completely absorb the news of the day, let alone delve into the many sources of information available on the universe of potential investment opportunities. While I have always made it a point to keep up with the important financial news sources, over the past month, I have stepped up my efforts to read everything I can think of related to investments in my “circle of competence”. I have found that regardless of how many hours per week I devote to such endeavors, when the end of the week arrives, there still remains a pile of reading material that has yet to be reviewed.
More Information vs. Better Information
Obviously more information does not always indicate better information. In today’s world of information overload, the security analyst must be able to differentiate between valid sources and material that cannot be trusted. I participate in various discussion forums, contribute articles to investment sites, and regularly review the writings of others. It takes time and effort to determine what sources of information to trust and what to avoid.
I wrote about Philip Fisher’s “scuttlebutt” approach recently. Access to information on the Internet is a form of scuttlebutt, but how can one know whether the sources of information are to be trusted? I’m afraid that there is no easy way to arrive at the answer other than to constantly evaluate sources, follow avenues that result in promising data, and quickly discard suspect sources. Often, the decision between following and discarding a source must be made quickly given the volume of information.
Market Efficiency Is Still Elusive
In my opinion, the stock market is no more efficient today than it was fifty years ago despite the vast advantage today’s investors have over our predecessors. While the problem in the past may have been a lack of information or delays in obtaining information, today’s problem is equally daunting: Making sense of the vast amount of information that exists and figuring out how to apply this information to making intelligent investing decisions.
One book that I read several years ago came to mind recently as I struggled with this problem. Robert G. Hagstrom’s Investing: The Last Liberal Art provides some good advice regarding how to approach different types of reading. In particular, he differentiates between reading intended for “informational” purposes versus reading intended to expand the “latticework” of mental models used to develop better methods of understanding. I am planning to re-read Hagstrom’s book to determine how his techniques can apply to my specific problem of information overload. I plan to write a more detailed article on Hagstrom’s book in the near future.