By Tim Courtney, Chief Investment Officer
In the movie Wall Street, Michael Douglas’ character Gordon Gekko states, “The most valuable commodity I know of is information.” In the 1980s, information for investors was certainly available but it was more costly and time-consuming to obtain. The information age has brought markets more material at lower costs than those investors would have dreamed possible. But do investors know what to do with daily downpours of information?
Gordon Gekko was mostly referring to insider information. Some argue for its legal use in trading so the market can more quickly and accurately incorporate relevant facts into prices. That is ultimately what markets do: quickly incorporate public knowledge into prices. This, in turn, helps households decide where they should work and what to consume, suppliers on what they should produce and investors on what they should buy, hold or sell.
Because, in large part, markets tend to incorporate information better than committees do, economies based on market or price systems have been much more successful than those based on centrally organized or rationing systems. Even well-funded committees with sophisticated data-gathering activities like the Federal Reserve have trouble predicting future activity (even as inflation accelerated, the Fed Survey of Professional Forecasters gave less than a 10% chance that 2022 CPI inflation would hit 4%).1, 2 Although, in fairness, markets didn’t do much better anticipating inflation levels this time either.
It certainly wasn’t from a lack of information. We’re now bombarded with it like never before, as every podcast, article and video competes for our attention. Investors have more choices in data providers than ever. Traders use data to create trading algorithms while other investors use data to create competing algorithms to benefit from the other’s trading activity. It is not unreasonable to ask if we are being saturated by information to the degree that adding more provides no additional benefit.
We should at least acknowledge that when we receive information, it is nearly always public in nature, not the insider variety. Therefore most other investors are also aware of it and there is a better-than-average chance market prices are already reflecting it. That doesn’t mean that prices are right, but that it is difficult to know when they are wrong.
It means prices are fair, and we can then decide to either accept or reject those prices. Information and historical data can be used to help us make that decision, but we should also acknowledge that information overload is noisy, sometimes irrelevant and sometimes connects matters of only tenuous relation together. It is even noisier in a time when distortions are working their way through markets following the 2020 shutdowns. It is yet another reason we believe it makes sense to remain diversified across sectors and assets.
If you have any questions about how we use information and prices to guide our decision-making regarding holdings and allocation please contact your Exencial advisor.
- Federal Reserve Bank of Philadelphia (11/15/21) — Survey of Professional Forecasters
- U.S. Bureau of Labor Statistics (7/18/22) — Consumer prices up 9.1 percent over the year ended June 2022, largest increase in 40 years
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