NAPFA CONFERENCE MATERIALS

Dr. H.W. Brock has made available for all NAPFA National Conference attendees an advanced copy of The MiniMax Review's June "Great Read". To access this paper which is one of three components of the monthly publication, please click on the "Read Full Paper" link below the Editor's Note.

"Resolving the Information Overload Problem"

Editor's Note from Dr. Brock: All too often, investment professionals joke amongst each other that some proposition is "merely theoretical." The implication is that what is theoretical is unlikely to be practical as well. The lie here is given by perhaps the snobbiest comment in the history of science, namely Einstein's retort to Niels Bohr about the integrity of the theory of general relativity: "Yes, Niels, I do like good theories. They work better."

My observation over the past two decades is that most investors who significantly outperform the market over the longer run do so because of their implicit or explicit utilization of good theories along the way. In using these, they prove less wrong than the consensus and thus end up richer; they know how to recognize specious logic on the part of the consensus and how to exploit it; they sound smarter to the clients whose money they manage; and perhaps most importantly, they manage their information overload problem much better than others do. For good theories clarify what to focus on and why--as well as what to ignore and why.

To sum up, the single greatest oversight of investment professionals may be to underestimate the true usefulness of good theories in better explaining and understanding the past, as well as in better forecasting the future--using the least information required. Included amongst such theories is the theory that clarifies when we should statistically extrapolate the past in predicting the future, versus when we should not. The following essay unifies all of these insights in a novel manner. It amounts to a restatement of why we are in business.