Things Investors Should Read. Things Investors Should Avoid.

YouTube, CBSNewsOnline.

This is Warren Buffett's office at Berkshire Hathaway (NYSE: BRK-B  ) headquarters in Omaha, Nebraska.

The portrait behind Buffett's right arm is his father. The file bin at the end of the desk reads "TOO HARD." There are some magazines, a pile of newspapers, and a phone.

But notice what you don't see. There are no stock tickers. No Bloomberg terminals. No charting software. No Twitter feeds. No pundits spouting forecasts. No computer monitors, and maybe not even a calculator. Buffett has created more than a quarter-trillion dollars of value for Berkshire shareholders from this desk over the last 50 years. And he did it while rejecting most of the "tools" investors utilize. We can all learn something from that.

We have more information than ever before. Are we better investors because of it? I don't know of any evidence that we are. In her book Bull!, Maggie Mahar writes: "The problem is that much of the information that investors want -- and think they need -- is just that, 'information,' not knowledge."

Good investors read a tremendous amount of information, of course. They're just more selective with what they read and pay attention to.

Here are few ways to become more selective.

Avoid explanations of random events. Pay more attention to historical context.
People can't stand the idea that events are random and unexplainable, so they try to attach meaning. You'll see things like, "Stocks fall 0.5% as investors react to manufacturing data" rather than the more honest, "Stocks fall 0.5% because they just do that sometimes."

Instead of reading explanations of what the market is doing, pay attention to what the market is doing in a historical context. The next time stocks have a down day, remember that they do that, on average, every other day. The next time stocks decline 10% from a recent high, remember that they've done that almost every year since the Civil War. And the next time we have a recession, remember that no one in history has made it to the 5th grade without living through at least one recession.

Trying to explain market moves gives us the impression that we can predict the future, which we can't. Looking at market moves in historical context reminds us to ignore the noise, which we can.

Avoid breaking news. Pay more attention to broad trends.
I found this headline from June 4, 2010: "Stocks Plunge After Weak Jobs Report."

It's true: There was a bad jobs report on June 4th, 2010, and stocks did plunge that day. But three years later, who cares? The initial jobs report was revised to show three times as many jobs created than originally thought, and the S&P 500 (SNPINDEX: ^GSPC  ) has since returned 59%. The must-read headlines from June 4, 2010 is now irrelevant and forgotten. The broader trend -- jobs slowly coming back, stocks still cheap -- was all that mattered for investors.

Breaking news is designed to tug at your emotions and give a sense of urgency, which is exactly when you're prone to making bad decisions. Broader trends are where the money's at.

Avoid strong opinions. Pay more attention to people who talk about their mistakes.
Psychologist Philip Tetlock has done some of the best work on the science of forecasts. One of his most startling findings is that analysts that are the most confident in their predictions have some of the worst track records, while those with the best records are constantly questioning their beliefs.

The media loves confidence and hates wavering views, so the analyst who yells the loudest gets the spotlight. Which explains another of Tetlock's findings: Analysts with the highest media profile have some of the worst track records.

Instead of paying attention to strong, loud opinions, give more weight to those who talk about why they could be wrong, what they've learned from past mistakes, and those who forecast in probabilities rather than certainties. They are less entertaining, but more likely to give good advice.

Avoid elaborate interpretations. Pay more attention to the handful of variables that matter most.
Most 300-page books can be summarized in 30 pages. The same one-tenth rule of thumb is true for most financial news and analysis. 

Investment bankers write incredibly elaborate 100-page deal presentations that I guarantee you no one reads. They just do it because they're making $1 million a year and they have to show their clients that they put in some effort. Journalists, while paid less, do the same.

You don't need to know the nitty-gritty details about finance or the economy. The big stuff -- how much you need to save to retire, broad valuation metrics, the few industries driving economic growth, the direction of jobs growth -- tell you most of what what matters. Not only is excessive volume a waste of your time, but the more granular an analyst becomes, the more prone he is to overthinking and confirmation bias. "It's better to be mostly right than precisely wrong," as the saying goes.

For more on navigating the media, including some of my favorite reads, see How to Read Financial News.

In the meantime, build yourself a "TOO HARD" file bin like Buffett has on his desk.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 


Read/Post Comments (1) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 29, 2014, at 12:54 PM, MfromG wrote:

    Thanks to the Fool I have learned the less I do with my brokerage account the more money it makes.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2713713, ~/Articles/ArticleHandler.aspx, 9/27/2016 4:44:52 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 7 hours ago Sponsored by:
DOW 18,094.83 -166.62 -0.91%
S&P 500 2,146.10 -18.59 -0.86%
NASD 5,257.49 -48.26 -0.91%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 4:35 PM
^GSPC $2146.10 Down -18.59 -0.86%
S&P 500 INDEX CAPS Rating: No stars
BRK-B $144.18 Down -0.82 -0.57%
Berkshire Hathaway… CAPS Rating: *****