Investor Morgan Housel writes on his blog
that the amount of raw, accessible information we have access to is orders of magnitude more than it was 20 years ago.
For example, Yahoo has historical financial statements of every public company. Twitter spits out 200 billion tweets a year.
Information is ubiquitous and free.
The problem is that adding context to all that information takes extra effort. As Housel puts it: “the path of least resistance is to know facts without a clue where they go or whether they’re useful.”
A key step to fixing this problem is to acknowledge that there are different types of information.
For Housel, when he comes across a piece of information, he finds it useful to bucket it into one of the following eight groups. (Housel is writing in the context of financial information, but his approach may be useful in other contexts.)
1. Useful but expiring
Take quarterly earnings. They’re useful, but no one cares what Apple’s Q2 2010 earnings were anymore because its usefulness has expired.
When you come across information you find important, Housel suggests asking: “Will I still consider this important a year from now? Five? Ten?”
If you don’t ask that question, you’ll likely default to thinking that the information will be useful forever, “which is the innocent reason we pay attention to what in hindsight was short-term noise.”
2. Useful and permanent
Permanent information teaches you what to do with expiring information.
For example, knowing that an investment’s price fell may be expiring information.
But as Housel notes, “knowing the longer history of volatility and its impact on people’s willingness to take risk is permanent information that will be just as valuable in 50 years as it is now.”
3. Irrelevant to you but relevant to someone whose decisions are relevant to you
Investing is the art of figuring out how and why other people make decisions.
And something one investor considers noise might be signal to other people.
If an investor’s job is to understand and predict other people’s actions, then what other people consider signal could be useful to you—even if you think the particular information is silly and irrelevant.
For example, Housel doesn’t trade. He’s a long-term investor. But long-term investors can be ruined by bubbles, and bubbles are driven by traders.
Incidentally, “Ignoring information that doesn’t affect you but does affect people whose decisions affect you is most of why politics is so nasty.”
4. Irrelevant but a window into how other people think, which is itself relevant
Paleontology is not directly relevant to investing.
But paleontology has insights about how things naturally grow too big for their own good, which is relevant to investing.
A lot of information can be considered a tiny piece of the broader puzzle that might help you understand why things happen.
“You rarely use the individual parts, which makes it feel irrelevant. But as a whole it can make the specific information of your field easier to make sense of.”
5. Useless but usefully entertaining
Every field has interesting and entertaining information that a rational practitioner would call useless.
But a reasonable practitioner might look at that same information and say, “Yes, but it keeps me engaged and that’s useful.”
For Housel: “Examples in investing go by the names of chart porn, FinTwit, CNBC, and many white papers and blogs. I don’t watch CNBC now, but I never would have become interested in investing without teenage exposure to the flashing lights and fist-pounding of its hosts. In that sense it’s some of the most important information I’ve come across.”
The trick is knowing when information is simply entertainment and shouldn’t influence your actions.
6. Useful only when combined with other information
Interest rates rise.
That depends on what investors expected before the rise, what they expect to happen next, why they rose, who raised them, the level and kind of debt outstanding, the rise relative to interest rates in other countries, and so on.
Few pieces of information are useful in isolation.
They’re often part of a broader puzzle where one piece only makes sense if all the pieces are assembled to show the broader picture.
And that picture typically has so many pieces that it makes sense to rely on simple rules that give you a general idea of the landscape.
7. Irrelevant in all circumstances
You know it when you see it.
8. Requires immediate action
This is the rarest type of information.