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.
The article Things Investors Should Read. Things Investors Should Avoid. originally appeared on Fool.com and is written by Morgan Housel.
Fool contributor Morgan Housel has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway.
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