Why too much noise can seriously impair investment decisions

Equity investors need information to make investment decisions, otherwise, no analysis of any kind would be possible. Without any information on a company, a decision to buy or sell would be a complete and total gamble. 

But what information do investors need? "The more the better" is a knee-jerk reaction to this question, yet caution us needed if adopting that approach. It pays to remember that Warren Buffett, during the '50s and '60s, went about creating a multibillion-dollar empire from his desk in downtown Omaha, Nebraska. And all he had on that desk were stacks of company annual reports, a Cherry Coca-Cola, a pen, a pad, and a phone he rarely used.

Buffett had no computer, no television, no Bloomberg or Reuters terminal, no direct market access, and no hotline to a broker. Not even anyone else in his office. Nearly virtual silence, the only noise being the rustle of annual report pages being turned and the occasional slurp of Cherry Coca-Cola. In that near silence, Buffett made investment decisions that put him on track to become one of the world’s richest people from a near-zero dollar starting position.

The trick Warren had learned, in large part from his mentor Benjamin Graham, was to go to the effort of either approaching companies for copies of their old annual reports or petition the SEC for a copy of an annual report that had been filed with them. That was the vital information he needed to invest but there was just no way to download a copy from a company website in 1956 when Warren started his first private partnership. And indeed, it was still like that as the seventies rolled in. 

Even recently, I was trying to review the 1973 annual report for Coca-Cola NYSE: KO as part of a study I was doing. That annual report is still not available on the Coca-Cola website even now, the only option is to buy a full original copy on eBay but that will typically cost around $100.

Looking back now, you can understand why Warren enjoyed a bonanza in those early years. He was expertly analysing difficult-to-access information that few others were looking at, never mind trying to analyse. 

At that time most of his peer’s investment decisions were more informed by share price moves. Because at that time, share prices were the most readily available and timely information that investors could access. This is almost certainly the inspiration behind one of Warren’s most famous quotes, “Price is what you pay, value is what you get”.

Jumping forward six decades to 2022, you’d guess that all investors are following the example set by one of the most successful investors of any generation. That investors would only be interested in information on companies that were either in their annual report or would be in their next annual report. 

The problem is that because of the world wide web, investors now have ready access to enormous amounts of information that would have been unimaginable back in 1956. And the temptation to access and try and use that mountain of information is overwhelming for most investors. These days, even flippant tweets by Elon Musk are considered information worthy of being the basis for an investment decision. The noise is at times deafening.

Take for example this recent screen shot of CNBC covering the US share market. It’s clearly very noisy. The bottom of the screen is filled with Chyrons.