Overview – Excellent Investment Analysis Is Impossible With Low-Quality Information
Say that, next month, you’ll be going on a month-long vacation to a country you’ve never been to before. In this case, it’s Japan.
Naturally, you want to make the absolute most out of your trip, so you decide to put together an itinerary. There are a lot of destinations, attractions, and activities you want to explore, but since you’ve never been to the country before you have no idea what the optimal order is to make sure you experience everything you want in an efficient and enjoyable manner. Therefore, you start performing some research.
Because it’s your first time visiting, the type of information you come across when performing your research will greatly impact the quality of your itinerary. Hastily putting together an itinerary based on cursory information and shoddy recommendations will probably lead to disaster. On the flip side, an itinerary built using high-quality information and recommendations from experienced travellers will most likely lead to a very enjoyable vacation.
Investment analyses and itineraries may not have a lot of similarities, but they do have one commonality: the quality of these things depends very heavily on the information that went into creating them.
Every day, investors all over the world rely on all sorts of information to make sure they make the best decisions they possibly can. Many investors go to great lengths to ensure they have the best possible information because they know that the quality of their decisions is directly proportional to the quality of their analyses, which in turn are directly proportional to the quality of the information that went into them.
You can have the best analytical skills in the world, but your analysis will be flawed right from the get-go if the information you work with is incorrect, out-of-date, or outright misleading. If you want to perform high-quality investment analysis, then the prerequisite is that you must first have high-quality information in your possession.
An Investor’s Ability to Gather Information Is Just as Important as Their Ability to Analyze It
Many investors put in the time and effort to constantly refine and improve their analytical skills, and rightfully so. After all, the insights they extract and the conclusions they form when performing their analytical work will directly impact the decisions they make.
While many investors place a lot of emphasis on constantly improving their analytical skills, not enough investors exert the same level of time and energy toward improving their information-gathering skills.
Before starting any sort of investment analysis, you first need material to analyze. You won’t get very far in your analytical work if you don’t have enough information to work with. You could be an investment analysis genius, but your intellectual prowess won’t be fully utilized if all the information you have is a handful of balance sheets from a few years ago.
Information gathering may, at a glance, seem like a very simple, if not trivial, skill to have. However, it involves much more than simply getting your hands on as much information as you can. This skill also entails knowing where exactly to look for the information you want, assessing the quality of the information you come across (more on this later), and knowing when the appropriate time is to use the information you have in your analytical process, among other things.
For example, everybody has an equal opportunity to search for information on the internet, however, some people know the right queries to ask and know of different places across the internet to look, while others may only ask surface-level queries all while depending solely on a single search engine. Because of this, the search results between people will vary, despite all of them having access to the same tool. What sets each person apart is their information-gathering skills.
Unless an investor has someone (or a group of people) they can delegate the task of information gathering to, it’s their responsibility to make sure they have the skills and know-how needed to get their hands on the high-quality information they need and know when the right time and place is to use it. Nobody will come to an investor’s rescue if they don’t have all of the information they need.
Information is the lifeblood of an investor’s analyses and the subsequent decisions they make; without it, nothing moves.
Not All Information is Made Equal
In the past, the challenge most investors faced was trying to get their hands on any sort of investment information. Before the internet age, the major sources of information for most investors were newspapers, magazines, and word-of-mouth.
Sure, financial statements from specific companies could be requested, but that would’ve meant calling investor relations, putting in a request for certain documents, and waiting for them to arrive via snail mail. If you happened to live across the country from a company’s head office, or you lived in an entirely different country, then this wait would be even longer.
Nowadays, however, investors face an entirely different problem: instead of dealing with a paucity of information, they must now deal with a deluge of it.
At first, this may not even sound like a problem at all. Isn’t an abundance of investment information that’s readily available a good thing? For the most part, yes: having lots of information that’s readily available is certainly better than having to fight for scraps of it.
However, this abundance of information has shifted the problem from one of quantity to one of quality.
To understand the problem at hand, it’s important to remember that an investment decision should be justifiable on both quantitative and qualitative grounds.
Quantitative information is usually straightforward to obtain; in fact, we’ve previously talked about different places to find it. However, not all of the quantitative data that investors come across will be of use to them. When preparing quantitative data for analysis, investors will need to know which numbers to focus on and which can be safely ignored.
Similar to working with numerical data, finding information pertaining to an investment’s qualitative attributes also presents unique challenges.
We previously looked at the importance of qualitative investment factors and why investors can’t afford to ignore them, but one problem is that investors need to judge the relative importance of each qualitative factor they come across. While some qualitative factors may be worth looking at very closely, others may not warrant the same level of attention. Additionally, there’s also the problem of distinguishing between qualitative factors that are worth looking at and vanity metrics.
Having an abundance of information at your disposal may sound like a dream come true, but it will quickly prove to be a burden if you don’t know which bits of information are worth your attention and which ones you can safely discard. An abundance of high-quality information, however, is the sweet spot investors should strive for.
High-Quality Information Leads to High-Quality Investment Analyses
In computer science, there’s a saying that goes, “garbage in, garbage out”: input data that is flawed or nonsensical will result in flawed or nonsensical outputs, regardless of how well put together your program/algorithm is.
Similarly, no matter how refined your analytical skills are, none of that will matter if the data you’re using is low-quality. Incorrect or flawed investment information will only result in an incorrect and/or flawed analysis.
If you want your analysis to be excellent, then you first need to make sure that the information you are feeding into your analytical process is high-quality as well. If “garbage in, garbage out” is true, then the opposite should be true as well: “quality in, quality out”.
Investors make decisions based on the analyses they perform, and these analyses depend on the information that went into creating them. There’s a reason why many investors go to great lengths to get their hands on the highest quality information they possibly can, with some even resorting to prohibited insider information.
Of course, using high-quality information is much easier said than done. That’s because the first step is to get your hands on such valuable information, but as we discussed previously, that’s an entirely separate battle that needs to be dealt with.
Ultimately, investors will need to ask themselves how high-quality they want their work to be, how much time and effort they’re willing to spend to get their hands on the high-quality information they need, and if that extra effort will be worthwhile.
An Abundance of High-Quality Information and Excellent Analytical Skills Go Hand-in-Hand
The qualify of investment analysis is, for the most part, comprised of three major components: the quality of the information being used, the amount of information you have, and the analytical skills of the investor. This can be expressed in a simple equation as follows:
Quality of Investment Analysis = Quality of Information + Quantity of Information + Analytical Skills of the Investor
Looking at this equation, it’s easy to think that strength in one area can compensate for weakness in the others, all while maintaining the quality of the analysis. Unfortunately, that isn’t the case: all components must be in top condition in order for the analysis to also be top-notch.
Working with high-quality information is important, no doubt, but if you don’t have enough of it on hand, and your analytical skills are lacklustre, then your analysis will be limited because you don’t have enough information to work with, nor do you have the skills needed to extract all the necessary insights.
An abundance of investment information is great, but if the quality of it is found wanting, and your analytical skills are equally as poor, then the only thing you’ll end up doing is going through mountains of information you don’t fully understand that ultimately may not provide the insights you’re looking for.
You can possess world-class analytical skills, but you won’t be able to make the most of your impressive skill set if you don’t have enough information on hand to work with and if the information you do have on hand is shoddy.
Wrapping Up
While many investors dedicate lots of time, effort, and energy toward improving and constantly refining their analytical skills, it’s easy to forget why they’re doing so in the first place: to extract relevant insights and form logical conclusions from a given source of information in order to shape their investment decisions.
An investor’s impressive analytical skills won’t be of much use if they don’t have anything to apply them on. Before any sort of analytical work is performed, the first step is to get your hands on high-quality information to analyze.
Information is the lifeblood of an investor’s analysis; without it, they aren’t going anywhere. Therefore, it’s their responsibility to make sure they can find all the information they need, discard any superfluous/low-quality sources, and know when to use certain bits of information in their analytical process.
In order to produce high-quality investment analyses, investors will need top-notch analytical skills along with an abundance of high-quality information. Weakness in one area cannot be made up for with strength in another – all aspects must be equally strong.
