Eggs or Oatmeal: Binging on Over-Analysis

December 13, 2010 at 12:23 am Leave a comment

I about chuckled my way out of my chair when ESPN reminded me of the absurd over-analysis that takes place in the sports world (I can’t wait for the 8 hour pre-game show before the upcoming Super Bowl) through a 30-second, football commercial. Typically when sports analysts get together, the most irrelevant issues are scrutinized under a microscope. After endless wasted amounts of time, the viewer is generally left with lots of worthless information about an immaterial topic. In this particular video, San Diego NFL quarterback Phillip Rivers innocently asks Sunday Countdown football analysts Chris Berman, Mike Ditka, Keyshawn Johnson, Tom Jackson, and Cris Carter whether they would like some eggs or oatmeal for breakfast?

Mayhem ensues while the analysts breakdown everything from the pros of frittatas and brats to the cons of cholesterol and sauerkraut. After listening to all the jaw flapping, Phillip Rivers is left dejected, banging his head against the kitchen refrigerator. It is funny, I feel much the same way as Phillip Rivers does when I’m presented with same overkill analysis found plastered over the financial media and blogosphere.

Analysis of Over-Analysis

Just as I mock the excess analysis occurring in the financial world, I will move ahead and assess this same over-thinking (that’s what we bloggers do). If this much analysis takes place when examining simple options such as eggs vs. oatmeal, or AFC vs. NFC, just imagine the endless debate that arises when discussing the merits of investing in a simple, diversified domestic equity mutual fund. Sounds simple on paper, but if I want to be intellectually honest, I first need to compare this one fund versus the thousands of other equity fund offerings, not to mention the thousands of other ETFs (Exchange Traded Funds), bond funds, lifecycle funds, annuities, index funds, private equity funds, hedge funds, and other basket-related investment vehicles.

Mutual funds are only part of the investment game. We haven’t even scratched the surface of individual securities, futures, options, currencies, CDs, real estate, mortgage backed securities, or other derivatives.

The investment menu is virtually endless (see TMI – Too Much Information), and new options are created every day – many of which are indecipherable to large swaths of investors (including professionals).

Sidoxia’s Questions of Engagement

Not all analysis is psychobabble, but separating the wheat from the manure can be difficult. Before engaging in the never-ending over-analysis taking place in the financial world, answer these three questions:

1.)     “Do I Care?”  If the latest advance-decline statistics on the NYSE don’t tickle your fancy, or the latest “breaking news” headline on monthly pending home sales doesn’t float your boat, then maybe it’s time to do something more important like…absolutely anything else.

2.)    “Do I Understand?”  If conversation drifts towards complex currency swaptions comparing the Thai Baht against the Brazilian Real, then perhaps it’s time to leave the room.

3.)    “Is This New News?”  Not sure if you heard, but there’s this new shiny metal called gold, and it’s the cure-all for inflation, deflation, and any-flation (hyperbole for those not able to translate my written word sarcasm). The point being, ask yourself if the information you receive is valuable and actionable. Typically the best investment ideas are not discussed 24/7 over every media venue, but rather in the boring footnotes of an unread annual report.

Investing in the Stock Market

For individual securities it’s best to stick to your circle of competence with companies and industries you understand – masters like Peter Lynch and Warren Buffett appreciate this philosophy. Once you find an investment opportunity you understand, you need a way of appraising the value and gauging a company’s growth trajectory. As Charlie Munger and Warren Buffett have described, “value and growth are two sides of the same coin.” Cigar-butt investing solely using value-based metrics is not enough. Even value jock Warren Buffet appreciates the merit of a good business with sustainable expansion prospects. As a matter of fact, some of Buffett’s best performing stocks are considered the greatest growth stocks of all-time. If you cannot assign a price (or range), then you are merely playing the speculation game. Speculation often comes in the form of stock tips (i.e.,stock broker or Jim Cramer) and day trading (see Momentum Investing and Technical Analysis).

We live in a world of endless information, and the analysis can often become overkill. So when overwhelmed with data, do yourself a favor by asking yourself the three questions of engagement – that way you will not miss the forest for the trees. As for stocks, stick with industries and companies you understand and develop a disciplined investment process by appraising both the growth and valuation components of the investment. If making these decisions are too difficult, perhaps you should stay in the kitchen and have Phillip Rivers whip you up some scrambled eggs or serve you a bowl of oatmeal.

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in DIS, BRKA/B, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Entry filed under: Behavioral Finance, Education. Tags: , , , , , , , , , , , , , .

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