wheat vs. chaff (ii)

The global investment landscape is extraordinarily complex. There are stocks and bonds and commodities, and a whole array of derivative instruments based on them. There are tons of national markets, all with different notions of what kinds of companies are appropriate to be publicly listed and what is most important in valuing them (typically either growth potential or income generation).

It’s impossible for even an apex-of-the-pyramid professional to be an expert in all of these areas.

For you and me, I think this is the most important thing to realize. Its most crucial implication is that it’s much better to know a lot about a small number of things rather than skim the surface in many areas–and, in essence, become the dumb money everywhere.

–For individual companies whose stocks we hold, it’s key to know the nuts and bolts of how the firm works. For most major companies, there’s a wealth of information in their SEC filings. There will likely also be useful data in annual reports, although it’s important to realize that these are marketing documents, held to a lower standard of completeness and rigor in their disclosure than the 10-K. We’ll certainly see the good stuff in the annual, but not any potential warts.

–it’s also important, particularly for investors with shorter investment horizons, to have at least a basic economic “weather report.” That is to say, is the general economy expanding or contracting? are interest rates rising or falling? are either inflation or deflation a problem?

more on Monday

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