Razor-Sharp Reading

William O'neill says to buy high P/E stocks. Buffet and David Dreman say to buy low P/E stocks. Most major broker/dealers suggest that investors get a piece of each sector and then overweight and underweight certain sectors. Buffet suggests avoiding entire sectors (like technology) and would also suggest that it doesn't make sense to buy every sector. Information overload is a challenge in our industry as well as in all other industries. Who do you listen to? Today, I am going to show you how to absorb as much information as possible quickly and to how to avoid bad information. After all, as Michael Douglas says in the movie Wall Street- nothing is more valuable than information. Specifically, I am going to show you how to read effectively and how to avoid bad ideas and stick with strong ones.

Read Effectively

One of the first challenges to reading is how to fit it into your schedule. Ram Charam said "ask yourself this: are you are at a higher level of performance and skill than you were 5 years ago? Think about it. Why did it take you five years?" I realized the answer to that question quickly- my reading was the primary reason. In the past 5 years, my skill level in many of my areas of life have improved almost entirely because of reading and watching DVD's and listening to tapes/CD's. So that means I should read more right? Absolutely. New information is more than just information. It is a vehicle to a brighter, MORE PROFITABLE future immediately!

So how do I get the most out of it? First of all you have to realize that you can learn about anything, but you can't learn about everything. There's not enough time. Don't kick yourself for not having a P.H.D. in statistics. It's not necessary to have one in order to make money. So here's your first technique:

Skimming - Your school teacher taught you to finish what you start. But that rule only makes sense with fiction books and as I said, there's not enough time to read all books. So when you go to the library or bookstore, look at the table of contents, introductions, and conclusions of books before you invest 4-8 hours of your life reading a book. I personally am focusing on books that provide statistical and historical data to back up trading strategies, so I toss most trading books aside when I read them. If I was interested in curing lung cancer, I might only read books that include verified/published research from accredited colleges. So skim books before you read them. You don't have to read entire books. There's no reason to read "filler" material. It is of no use to you.

Take notes - I recommend taking written notes in your word processing software. I have hundreds of pages of notes from books I've read. The key to note taking is this. You MUST paraphrase when taking notes. If you cannot express an idea in different words, that means you don't understand it. Repeating someone's exact words does not mean that you get it. The reason reading changes people so much is that it creates new understanding. New understanding creates new action and new action creates new results. Paraphrasing is a way to almost guarantee new understanding.

Think Effectively

We spoke earlier about how hard it is to decide on who to listen to when reading. Here are some key points to remember when reading.

1. Understand - You need to know exactly what someone is saying before you can disagree with him. Once again, try paraphrasing.

2. Explain yourself - Agreeing with someone without knowing why is ridiculous. Disagreeing with someone without reason is equally preposterous. Interestingly enough, this insight will help you recognize when someone else has disagreed without a reason.

3. How to disagree - Here are several reasons to disagree with someone's ideas. The first reason is LOGIC, that is, the conclusion that someone has drawn is illogical. The second reason is that the person is misinformed. The third reason is that the person's analysis is incomplete. The fourth reason is that the author is uninformed about something. It's likely that if you disagree without one of these reasons, that you may be disagreeing out of spite, ego, or because the conclusion is inconvenient to you (which means you disagree even though you have no logical reason to).

4. Know the difference - between a sales pitch and real information. Did you watch the last presidential election? Both candidates had access to the same economic information and one candidate wanted to show that the economy was doing well, while the other said the economy was in bad shape. If you omit the right data, you can get the data to suggest anything. Ask yourself what the author or speaker is trying to achieve. Filter out alterior motives.

That's it for today. In conclusion, remember how important reading can be and do it well. In school, they never really taught us how to read, so throw those old rules out and adopt new ones. If you want to be profitable in trading, then you'll need more than just your instincts. You'll need a constant flow of new information.

Price Headley is the founder and chief analyst of BigTrends.com.