Investing in the Misinformation Age

If the last half-century was the Information Age – a time of rapid progress in terms of access to information – I think it’s fair to say that we’ve gone beyond that and crossed firmly into the Misinformation Age. COVID and the US Elections have demonstrated how easy it is to deliberately spread extremely polarizing disinformation on both ends of the opinion spectrum. This kind of disinformation can influence behavior significantly, sometimes impacting masses of people. This has always been true for financial markets (though probably with less malice) where mass euphoria and mass hysteria have driven market cycles to opposing extremes for centuries. What has been the cause of this? Too much information. More specifically, too much of the wrong information.

Financial media – or business entertainment if you prefer – has always pushed the excitement factor of investing. Big success stories, dramatic meltdowns, outliers and extreme performers, bold predictions made with absolute confidence, exciting growth stories and edgy investing trends. Balance sheets and valuations are far too boring for TV.

The key to successful investing is being able to sift through the ocean of misinformation and find that information which has some value. Ignore everything else.

Focus on things that are knowable and important

At the 1998 Berkshire Hathaway annual shareholders’ meeting, Warren Buffett was asked about his views for the global economy over the ensuing decade. His answer was that he focuses on things that are important and things that are knowable. The future global economic environment? Unknowable.

More than 20 years later, with more ‘information’ at our fingertips than ever before, this advice is probably more relevant than ever. A useful framework for assessing information is to categorize everything according to the following matrix:


Quadrant 1

Quadrant 1 represents information that is both knowable and important. This is where Buffett would recommend we focus our attention. This includes things like current valuation, financial strength of the business, cash flow, rough financial estimates, some ballpark scenarios of how the business is likely to develop over the long-term, competitive position of the business, profitability, etc. Although this information is readily available, it isn’t very exciting. We don’t see much attention drawn to this quadrant in our business entertainment. This provides an edge to those who are willing to forgo the entertainment factor and keep discipline with a process focused on these things. That’s what we do at Bellwood.

For individual investors, information about the fees you’re paying to advisors (and fund managers and product providers), as well as the transparency of your investment structures is critically important yet often ignored. Most investors would do well to spend the time looking into this.

Quadrant 2

Quadrant 2 represents information that is knowable, but not important. This probably represents the bulk of what is produced by financial media. It includes things like the discussion of daily market fluctuations, arbitrary economic data points, precise quarterly earnings numbers, endless expert opinions, etc. It could be summed up as over-analysis. Investors can easily make bad decisions when they become distracted by irrelevant information or suffer from analysis paralysis.

In practice, professional analysts spend their days learning about every detail of an industry or company. The vast majority of this information isn’t useful for the purpose of making investment decisions. Worse, too much useless information can lure you into the trap of focusing on the wrong information. It becomes a distraction. Knowing a lot about something isn’t the same as knowing what’s important.

Quadrant 3

Quadrant 3 represents information that is important, but not knowable. In other words, if you could know it, it would be very useful, but you can’t. The investment industry spends a lot of time and money trying to get at this info and convincing themselves that they do indeed know it. The timing of the next market crash, 12-month target prices, 2021’s outlook for the dollar, the next recession, upcoming election results, etc. CNBC has no shortage of gurus ready to tell us all when the next big meltdown is coming. This despite their terrible track record of getting these calls right in the past.

In day-to-day practice, most fund managers take a top-down approach based on macroeconomic forecasting which informs their asset allocation, geographic allocation, industry allocation, etc. Bottom-up stock selection is an afterthought, often also built on predictions or narratives, despite the evidence that this approach doesn’t add value.

Quadrant 4 represents information that is neither knowable nor important – things we don’t know, that have little impact on investment outcomes.


I’ve highlighted quadrants 2 and 3 in red because these are the areas where most investors get side tracked to their detriment. These areas are also where the business entertainment tends to focus. If you want to become a better investor, think about the information you consume and start to categorize it according to this matrix. Then spend less time in quadrants 2 and 3 and more time in quadrant 1. Professionals would also do well to direct their resources away from analysis and development of models focused on quadrants 2 and 3 towards quadrant 1.


A Practical Example: ZAR Blinkers

We’ve written about this before in Don’t let the Rand dictate your portfolio but this example is so prevalent that we need to highlight it again. Most South African investors recognize the need to invest globally. But when it comes to pulling the trigger there is one factor that drowns out all other considerations: The ZAR exchange rate. If I were to categorize this in terms of our information matrix, I’d put it somewhere between quadrants 3 and 4. Definitely unknowable with debatable importance.

Although the exchange rate is important when viewed in isolation, it is only one of a number of other important factors that impact your investment returns. Once due consideration has been given to all of them, the exchange rate becomes far less important. When investing in a global portfolio there are many currencies, not just USD. These exchange rates are also important, and some of them are also cheap. What about valuations of the actual assets you’re buying? These are of far greater importance than the exchange rates.

Right on ZAR, but wrong overall…

What can we know about the ZAR exchange rate? We can know that over time it is likely to follow a weakening trend against most developed market currencies. We can also identify extremes in the exchange rate, though we can’t identify inflection points with any accuracy. Short-term moves are unknowable. The same is true for stock market valuations. But we often find extreme ZAR weakness is accompanied by depressed stock market valuations. What you lose on the one, you tend to gain on the other. This makes short-term moves less important.

Let’s go back to 3 April 2020. The USD.ZAR exchange rate was 19.04. At 31 December 2020, the exchange rate was 14.69. Many investors sitting on cash earmarked for offshore investment would have balked at the idea of taking money offshore at 19.04 to the USD. So they sat on their cash and waited. Come December, 14.69 looks a whole lot better – 23% stronger – well done. Only… the MSCI World Index rose 54% in USD (18% in ZAR) over that time. So we got the exchange rate right, but we’re worse off by 18% overall because we weren’t paying attention to the other important factors.

Risk management is important

Another important consideration is how much of your wealth is focused in South Africa. Most South African investors have the vast majority of their wealth focused in South Africa (which represents less than 1% of the world). They send money offshore because they need to manage their risk (and they want to take advantage of the wider opportunity set). But some like to speculate on the currency by bringing it back when the Rand seems weak, hoping to take it out again at a better rate. This is a dangerous game to play when you consider that the Rand is highly unpredictable. It is also only one of many other factors that affects your total return. Finally, the principle of risk management through global diversification (which falls squarely into quadrant 1) should dwarf any potential return from playing the exchange rate over time.

As South African investors, we put far too much importance on the exchange rate when it comes to global investing.


Two other common examples that investors should beware of:


  1. Trying to time the next market crash. You’re better off focusing on asset allocation and investing consistently through market cycles;
  2. Making investment decisions on the basis of big macro themes or stories: The Dollar, the Fed, QE, China, aging population, green technology, etc. These are difficult to predict and even more difficult to quantify. You’re better off building a globally diversified portfolio focused on simple investment fundamentals at the micro level.


When making investment decisions, don’t fall into the trap of being distracted or blinkered by considerations that fall into quadrants 2 – 4. Focus solely on considerations that fall into quadrant 1. Rather blinker yourself from the ocean of other misinformation out there. You’ll achieve better results over time.