Can You Know Too Much?

The answer is an unqualified maybe.  It depends on what you “Know.”

Consider the Warren Buffett thought from the 1996 letter to shareholders.

“To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these.

Why would he say that?  Most academics would argue that all of these can help you.  Certainly none could hurt you.

Or could they?  Suppose these topics are statistical observations and do not truly represent meaning.  They are certainly incomplete.  There are more observable relationships and factors.  What if they draw attention away from the important factors?

What if the people who are promoting these ideas benefit from that promotion?

The next part of the thought.

” That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects.”

No surprise.  People make what they know appear important.  That is how they earn their living.  As Colbert says.  Their subject is “truthy”

Buffett offers a solution in the last part.

“In our view, though, investment students need only two well-taught courses – How to Value a Business, and How to Think About Market Prices”

Warren may well be right.  He and others who have followed the same path, have substantially outperformed others who use more conventional methods.  The academics treat these managers as outliers and to be ignored.

If you are your own portfolio manager, it may be productive to give some thought to the true fundamentals.  Is this a good business?  Is it likely to remain so?  Does Mr. Market price it such that I have a safety margin?

The rest of the parameters are just stuff.  Interesting and internally consistent, but still just distractions.

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact:  

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