Friday, February 25, 2011

Investmen Management : what we need to know ?

Question 2.1. Imagine you are a portfolio manager who buys and sells stocks over time in your quest for above-average investment returns. Also, imagine that you have a system at your disposal that can provide you with any up-to-the-minute data on the economy, your portfolio, or individual securities. (Given today’s technology and the myriad sources for historical and up-to-the-minute financial data, this is not a hypothetical question.)
a. Make a list of the data items that you would like to have to guide your quest for above-average investment returns.
b. Note on your list, as precisely as possible, how you intend to use the data once it is received.
As you answer these questions there are two important caveats.
First, the data you request cannot include peeks into the future. Asking, for example, for all of the stocks that will appreciate by more than 20 percent over the next 12 months is not a legitimate request.
Second, your “would like to have” list cannot include inside information. Given the vigilance of today’s regulators, if you attempt to procure and use information that is not in the public domain it is not likely you will be around long enough to finish this book.
Question 2.1—“what you need to know and why you need to know it” as well as the equally important corollary “what you do not need to know and why you do not need to know it”—cuts to the heart of the puzzle faced by all investors. The answers to this fascinating question will unfold in the chapters that lie ahead. I can promise that when you reach the last page you will be armed with keen understanding of “what you need to know” and “what you do not need to know” to make better investment decisions.
Question 2.2. What is your biggest problem when making invest-
ment decisions?
a. Not enough information.
b. Not receiving information fast enough.
c. Too much irrelevant information.
d. All of the above.
e. None of the above.
There is a huge paradox in the way most people approach investing. If you are a typical investor, even though you rank financial success and security among your most sought-after goals, you pursue this goal with a mixture of guesswork and wishful thinking. You routinely watch your favorite news channel and listen to your favorite radio station for market updates. Paradoxically, however, it is most likely that you are not up-to-date on the knowledge that you need to reach your financial goals. Similarly, if you are a typical fiduciary, you are bombarded by a barrage of usually conflicting in-
formation about how best to fulfill your responsibilities to the beneficiaries you serve.
In an insightful article written at the dawn of the information age (1967) Russell Ackoff1 (at the time a colleague of mine at the Wharton School of the University of Pennsylvania) posited that the universal problem facing all decision makers—in disparate fields from weather forecasting, to medicine and, especially, investing—is that we all suffer from an “overabundance of irrelevant information.” Ackoff coined the term “management misinformation systems” to describe information systems that are designed to provide decision makers with more information, delivered faster, and that fail to take into account how the information will be used. Answers “a” and “b” to

Question 2.2 are
incorrect because they each describe elements of a “management misinformation system.” The correct answer is “c”—you have too much irrelevant information.
My favorite description of a management misinformation system was provided by Norman, one of my Wharton students in the
late 1960s. Norman had a weekend job in the data-processing de-
partment of a large, well-known Philadelphia company. Each week-
end his task was to run, print, and bind a report that was described
to him as the “backbone” of a key division.

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