I am increasingly coming to the conclusion that it is temperament & emotional behavior and not intelligence/insight that drives the majority of successful investing. Knowing common behavioral traps and being aware of your own behavior is key to becoming a truly successful investor.
Excessively relying on information is one of the behavioral traps that researchers are increasingly focusing their efforts on. As the amount of information rises around an investment decision, the greater the likelihood that noise will crowd out core signal in the process. In fact, with studies on genius, research has shown that experts do not necessarily process information more quickly than any of us, but rather they simply and cut noise out more effectively. They use pattern recognition to quickly cull options and focus on the most relevant.
Michael Mauboussin of Legg Mason is one of the more interesting writers in the investment circles. His partner, Bill Miller, is one of the most reknowned investors in the world for having beaten the markets for 13 straight years (just missed last year). He has published two interesting pieces on investment approaches and psychology. I will write later about his second one, Turtles in Omaha.
Michael recently wrote about the impact of information on horseracing results. The handicappers grew increasingly confident in their rankings as they were given more & more information. The irony, however, is that their predictions deteriorated as they moved from having 5 pieces of information to 40 pieces. So, they became more confident in their results just as they were getting worse.
I have always been amazed by the simplicity of Warren Buffett's approach. He does not have seas of analysts (I don't believe he may have any) nor does he do excessively deep diligence dives into companies. He becomes "competent" in certain areas and, though he doesn't mention this much, leverages the opinion of key people he knows in each area. This is also why you often see investors have repeated hits in a given area. They are able to determine who has the most reliable and relevant networks in a given field and use them to accelerate decisions.
For many investors, they develop a gut feel for an opportunity and then leverage data points to confirm that feeling. Some are quantitatively driven in the hedge world but this is not really possible on the venture side due to the immaturity of many business models. Overall, what this says is that good investors are those that can determine effectively what are the key pieces of information versus gaining access to the broadest array of information. Furthermore, it provides a warning to investors that having more information is not always (some would say usually the opposite) a good thing and to not take comfort in masses of numbers and facts. In the end, it is the simple core things and your network of people that makes the difference.