Using Inside Information
One of the first things that any trader or fund manager needs to learn about is insider trading. The most important lesson is that it is illegal, and anyone doing it might go to prison! So don’t do it.
Over the years, most such tips we have heard (and rejected) were losers anyway. Insiders often do not know how news will affect the market. Their big ideas and plans are frequently not embraced by the investment community.
At "A Dash" it is not our mission to help readers to commit a felony by trading on material non-public information. Instead, let us look for material public information — the legal type that most others miss on a systematic basis.
In this series of articles we will describe how to use information. This is at the core of our work, and these articles will reveal how to do it and provide some examples. Readers who follow the entire series may not realize the power of these "secrets" because we hope to make it seem obvious. The information is hidden in plain sight.
Two Types of Investor Errors
Let us begin with an oversimplification. We shall add some qualifications later. There are two basic types of errors.
Type 1: Believing the big guy. The "big guy" may be very rich, a legendary investor, a noted columnist, a leading blogger, or a celebrity on financial television. The big guys make a lot of mistakes — glaring ones on occasion — but these usually go unnoted. Interviewers do not ask the tough questions. Outside commentators in the blogosphere may not engage in criticism. If they do, their comments often get less attention.
Type 2: Neglecting the little guy. The "little guy" can appear in many forms. It does not require a PhD to observe and report important facts. Valuable insights come from many places, and these are often overlooked. The information used by many includes bias against certain sources, including those in government and stock analysts. We shall discuss how to use this information to gain a significant investment edge.
The Method, LINQCRED, will seem simple, because
it is. The value comes because so few
use critical thinking skills in evaluating data. The steps are as follows:
- Listen. Or read, as the case may be. If the observer is busy being critical because the information does not fit his/her pre-conceived notions, there is no chance of learning. One learns by listening, not by speaking.
- Information. Is the new information data or analysis? This is a crucial step. Does the source provide specific relevant information or is it an interpretation of data available to all?
- Novelty. Does the information really provide something new? If not, does it provide significant new data to support an important market hypothesis?
- Qualifications. Is the source authoritative on the specific subject in question? If the information consists of data, is the source an accurate reporter? If it consists of analysis, does the source consistently follow an analytic method that has a proven record?
- Competence. Does the observer have the skill to evaluate these questions? If the information consists of data, can you make the key distinctions between new data and redundant information? If it is analysis, do you have the methodological skill to review the conclusions? This is the most
difficult point, and the most important. It is a place where many investors stop thinking and rely on perceived authority.
- Review. Any good method requires checking. The investor should review each of the steps, carefully checking reasoning and conclusions. Think carefully before acting!
- Evaluation. Good information leads to a specific investment decision. This means a careful evaluation of the impact on expected earnings compared to alternative investments, with consideration of risk. Earnings, alternatives, risk. Those are the fundamentals.
- Discipline. Having reached a conclusion, the investor must have confidence in the method. Warren Buffett buys good businesses at good prices. He is not dismayed if the market disagrees. He buys more! The investment conclusion is based upon facts, not the current opinions of others in the market. If the facts change, you should change. If not, the investor must not react emotionally. Investment decisions will rarely result in buying the exact bottom or selling the exact top. That is not needed for success.
The emphasis on the “big guy” can be checked by reading
about the current media frenzy to find the big story.
Readers who think they are skillful in analyzing experts
should check out their quantitative IQ. The example provided leads to an important market conclusion, widely
disseminated on the Internet, and difficult for many to interpret. The popular conclusion is completely wrong. Despite this, only a few experts have given us a correct