Switch off your BlackBerry. Turn off the TV. Stop reading the newspaper. You are taking in too much information, and it's forcing you to make bad investment decisions.
It sounds like a hypnotist's mantra, but the advice comes from behavioural investor James Montier, the respected ex-Soc Gen analyst and a member of GMO's asset allocation team. He suggests you focus on three basic tests instead.
In an interview today, Montier notes: "the great belief is that more information is always better. The problem is that it ignores the fact that the human brain is a limited processing device. We're not a crazed supercomputer that can handle bytes and bytes of information simultaneously. If you give people more information they actually make worse decisions. So it's far better to be focused on what matters rather than trying to collect all this information which doesn't really improve your performance at all."
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
So what should you be focused on? Value investing, says Montier, the "only tried and tested method of delivering sustainable long-term returns". That's a point he makes forcefully in his new book, "Value Investing: Tools and Techniques for Intelligent Investment" And to find decent value stocks, you need to apply three tests:
Is the stock cheap? "If it is, it's a potential investment. If its not, forget about it there and then".
What does the balance sheet look like? A stock needs to be cheap for a reason. "You can't really analyse earnings without understanding the balance sheet behind those earnings. Yet I feel that a lot of professional analysts have very little grasp of it."
What is the management doing with the capital given to them? "Are they going to spend it on their pet projects or something useful."
He concludes "Wall Street and the City would have you believe that you need to know everything about everything before you make an investment. But to make an investment, what I need to know is actually really limited. Just concentrating on those three things -valuations, what's on the balance sheet and capital discipline - is enough to get you really thinking of what you're doing."
One stock that cuts the mustard is GlaxoSmithKline (LSE:GSK). Third quarter profits rose by a respectable 11%, but the forward p/e ratio is a modest 11, below the FTSE 100 average.
-
Private school fees soar and VAT threat looms – what does it mean for you?Rising private school fees could see more than one in five parents pull their children out of their current school. Before you remortgage, move house or look to grandparents for help, here’s what you need to know.
-
Best and worst UK banks for online banking revealedWhen it comes to keeping your money safe, not all banks are equal. We reveal the best and worst banks for online banking when it comes to protecting your money from scams
-
House prices to crash? Your house may still be making you money, but not for much longerOpinion If you’re relying on your property to fund your pension, you may have to think again. But, says Merryn Somerset Webb, if house prices start to fall there may be a silver lining.
-
Prepare your portfolio for recessionOpinion A recession is looking increasingly likely. Add in a bear market and soaring inflation, and things are going to get very complicated for investors, says Merryn Somerset Webb.
-
Investing for income? Here are six investment trusts to buy nowOpinion For many savers and investors, income is getting hard to find. But it's not impossible to find, says Merryn Somerset Webb. Here, she picks six investment trusts that are currently yielding more than 4%.
-
Stories are great – but investors should stick to realityOpinion Everybody loves a story – and investors are no exception. But it’s easy to get carried away, says Merryn Somerset Webb, and forget the underlying truth of the market.
-
Everything is collapsing at once – here’s what to do about itOpinion Equity and bond markets are crashing, while inflation destroys the value of cash. Merryn Somerset Webb looks at where investors can turn to protect their wealth.
-
Value is starting to emerge in the marketsOpinion If you are looking for long-term value in the markets, some is beginning to emerge, says Merryn Somerset Webb. Indeed, you may soon be able to buy traditionally expensive growth stocks on the cheap, too.
-
ESG investing could end up being a classic mistakeOpinion ESG investing has been embraced with enormous speed and zeal. But think long and hard before buying in, says Merryn Somerset Webb.
-
UK house prices will fall – but not for a few yearsOpinion UK house prices look out of reach for many. But the truth is that British property is surprisingly affordable, says Merryn Somerset Webb. Prices will fall at some point – but not yet.
