Many decades ago, technology was limited, and information asymmetry could be more effectively arbitraged to achieve outperformance.
Let’s imagine a relatively unknown company whose market capitalization was trading below book value. Their financial data was shoved towards the back of a Moody’s Manual in the days before the internet. Only those who would be willing to put in the work could find these hidden gems and take advantage of these relatively unknown opportunities.
But today, things are different.
We all should have no difficulty finding company data, equity analysis, and public filings offering us insights into the corporations we entrust with our capital.
Here’s the evidence:
1. I can use public stock screeners to isolate a “Quality Compounder” trading at a significant haircut from a 52-week high, potentially screening for undervalued opportunities that align with my investment philosophy.
2. Without even signing up for an account, I am able to access 15 years of financial data on businesses on websites like roic.AI.
3. I can research most public information on a business directly from the corporation itself. Most companies publish investor relations pages on their website, with troves of documents such as 10-Ks, 10-Qs, Schedule 14-As, and much more.
4. If I wanted opinion pieces on the business, Substack offers a Vault of high-quality investment writeups from excellent creators.
…And I could go on and on.
The takeaway: information is no longer scarce.
The issue?
More information and increased digestibility does NOT always translate to better financial decisions.
Instead, we are more prone to fall victim to suffering conviction and cognitive overload, when the information or tasks you try to process exceed your brain's working memory limit.
Gaining conviction in an investment takes time and energy because you only achieve high conviction from understanding a business throughout. A 10 minute speed-run analysis would not build sufficient knowledge to effectively empower anyone to withstand bear cases or fear-mongering news.
Not only this, but over the longer-run, our brains can’t process or recall all the information we researched at the very beginning, nor can we perfectly remember the exact thesis throughout the entirety of the holding period.
Instead, the “scarce resource” has shifted from getting enough quality information to:
* Attention
* Judgment
* Memory
* Consistency
So where does the alpha really lie?
>In order to be a successful long-term investor, you need to be able to explore information while staying rooted in your original thesis.
You must know why you bought the investment.
You must know the data behind it.
You must know why the investment opportunity aligns with your philosophy.
And most importantly, you’ll then know when it’s time to sell.
To achieve this, you must build a disciplined framework for investing.
1. Document your thesis. (Why did you buy the asset?)
2. Collect your research. (What backs up your thesis?)
3. Define allocation targets. (How comfortable am I with this position in my portfolio?)
4. Define allowable entry and exit points. (At what price am I willing to own this asset?)
These will create boundaries that will help manage your emotions and reinforce discipline for the duration you hold the asset.