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Thursday, March 11, 2010

That's a Fact, Jack


Over time I have received many good pieces of advice about investing, but one of the simplest and best was, “learn to separate opinions from facts.” Whenever there is financial turmoil, emotionality reigns - and emotion is the mortal enemy of logic. Truths becomes distorted. Facts become obscured in the fog of opinion. To be a great investor, you must first filter these facts, and then form your own opinions.

To illustrate how easily opinions and facts can become obscured, I have included a few recent examples from the media…

- “Greek borrowing rates increased by as much as 10-15% as a result of speculation that Greece would default on its debt.” OPINION
- “A market frenzy in recent weeks saw traders make bets worth billions of dollars against the euro and on the chances of Greece not repaying its massive debts. FACT

- “Due to changes in fuel efficiency and the move to hybrid and electric vehicles, demand for oil will drop by as much as 25% in the next 5-10 years. OPINION
- “Most Americans, and an increasing number of Chinese and Indians, drive gasoline-powered vehicles to work every day.” FACT

- “World demand for oil will increase by 900,000 barrels per day this year.” OPINION
- “OPEC believes that world demand for oil will increase by 900,000 barrels per day this year.” FACT

Note that opinions often provide more specifics than truths, thus obscuring the fact that they are merely opinions (read that sentence two times fast)! Don’t be mislead. Read every news story with a skeptical eye. Think, “How could this article be wrong? Do the facts (if any) support the conclusion? If it seems logical, what could derail it?” Recognize that correlation does not imply causation. Recognize that taking an opinion contrary to the crowd does not necessarily make it right. Then, after reviewing the data, form your own opinion with a blatant disregard for everything you just read – except, of course, the facts.

"You can't do well in investing unless you think independently. And the truth is, you are neither right nor wrong because people agree with you. You're right because your facts and reasoning are right." Warren Buffett