The Proof: More Information Does Not Improve Your Share Picking

If you want to improve your share picking and are of the opinion that you need more information to achieve this then listen up.

You’re wrong.

It’s not a lack of information that is causing your problems.

If anything, the extra information is more likely to hinder.

Don’t believe me?

Here’s the proof…

CIA Research

In an experiment commissioned by the CIA (Central Intelligence Agency) in the late 1990s, eight experienced horse race handicappers were shown a list of 88 different items of information found on a typical performance chart such as:

  • the weight carried by the horse
  • percentage of races where the horse finished first, second or third
  • the number of days since the horse last raced
  • the jockey’s record
  • etc.

Each handicapper was asked to identify what he considered to be the 5 most important pieces of information i.e. those he would wish to use to handicap a race if he were limited to only 5 items of information for each horse.

Each was then asked to select the 10, 20 and 40 most important variables he would use if limited to those levels of information instead.

Next, they were given true data of 40 past horse races with the data sterilised so that the horses and races could not be identified.

They were asked to predict the top 5 horses in each race in order of expected finish and provided the data in increments of the 5, 10, 20 and 40 variables he had judged to be the most useful to him.

Hence, he predicted each race four times, once with each of the four different levels of information.

For each prediction, each handicapper was also asked to assign a value from 0 to 100 percent to indicate how confident they were in the accuracy of their prediction.

The Results Were Surprising

When the handicapper’s predictions were compared with the actual results of the 40 races, the average accuracy of the predictions was almost constant at 17% regardless of how much information the handicappers had available.

However, all the handicappers expressed steadily increasing confidence in their predictions as more information was received.

With only 5 pieces of information, the handicappers confidence of 19% correlated very well with their actual accuracy of 17%.

However, when they used 40 items of information, their confidence grew to 32%, even though they were still only 17% accurate in their predictions.

In other words, more information led to overconfidence instead of increased accuracy.

Other similar studies with clinical psychologists and doctors when diagnosing patients found similar results in the relationship between the amount of information available, accuracy of diagnosis and analyst confidence.

What Does This Have To Do With Investing?

You’re probably thinking that this is an interesting story but what does it have to do with investing?

Well, what if we substitute shares for horses and replace the handicapper with you?

Your accuracy with picking the shares that will become winners is now nothing to do with the amount of information you have available.

But it has everything to do with the information that is the most important predictor of success.

Which begs the question, what are the key items of information that you need to pick shares?

This research also suggests that if you spend your time focusing on this limited, important information you can save yourself a lot of time analysing other superfluous stuff.

How To Optimise Your Share Picking Process

Over the years that I’ve been investing, I’ve learned to pay particular attention to a limited amount of information.

Essentially, I use seven different kinds of information and I’ve structured it into a process that I use when I’m picking my shares.

It’s an approach that gives me a quick view of whether a company is going to be a good or bad investment in less than 5 minutes.

Sometimes it only takes me 1 or 2 minutes.

The rest of the time I spend is making sure that I’ve not overlooked anything.

Experience of doing this over the past two decades has taught me that my first impressions of a company (good or bad) are usually correct.

If you’d like to follow my tried and tested process with detailed checklists of what to analyse then you might want to check out 5-Minute Share Picks.

Otherwise, leave me a comment below about the kinds of things that you like to analyse when you pick your shares or ask me a question you have with regard to improving your share picking.

5-Minute Share Picks

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