- Information technology revolutions change investing
- Investors face the challenge of too much information
- Here’s how that challenge will be solved by the next great investor
The biggest challenge facing investors today is noise. And I don’t mean your neighbour’s new puppy. I mean the deluge of information flooding your brain, sometimes whether you like it or not.
Back in the days of the famous investor Nathan Mayer Rothschild, it was all about the speed of information flows. Whoever had won a battle like Waterloo was vital to financial markets. The news could be communicated by runners and riders… or much faster, by Rothschild’s pigeon mail. He who got the news first knew what to buy and sell first, thereby capturing all the profits.
Of course, that sort of thing still goes on. A few years ago, a scandal broke about hedge funds that purchased access to information revealing stock market orders that had been submitted to the exchange but were yet to make their way down the wires for actual processing. By knowing what buying and selling was about to happen and then front-running it with much faster wireless transfers of their own orders, the funds could scalp the market.
Next came the idea of using satellite images to gain an investment advantage. That’s much more similar to the problem we face today – too much information, with the secret being knowing where to look and how to sift through it.
Such shifts in information technology have long dominated investment success.
The Irish banker Cantillon, who profited from the boom and bust of both the South Sea Bubble and the Mississippi Bubble, carefully grew a network of contacts that fed him the information that he needed from across Europe. These included John Law, who engineered the Mississippi Bubble.
For Cantillon, it was all about who you know, not what you know. Although he pretty much created the field of economics on the side…
Warren Buffett is famous for his analytical ability when it came to information that all companies published but nobody bothered to look at – their annual report. His intellect allowed him to process the information in a way that unlocked information that others didn’t have access to.
A bit like the government’s budget, these days annual reports are full of glossy pictures instead of hard numbers in a boring hard-cover book. And any numbers that remain are subjected to some dodgy adjustments, which you need a forensic accountant to untangle.
Central banks, which appear to drive financial markets by looking in the rear-view mirror, have completely upended the way they deal with and release information over the years. Not so long ago, they’d make decisions on monetary policy without any announcement. Market participants would have to figure out what monetary policy was based on what was happening in the market.
Then they began to release some information after having made the decision. Whereas, these days, central banks are all about managing expectations, transparency and telegraphing decisions in advance to avoid any surprises.
This has gone so far that central banks are suspected of floating trial balloons on potential policy decisions via select journalists. If a prediction about upcoming central bank decisions is published by a suspected confidant in the Wall Street Journal, the market moves and central bankers can get a feel for how that policy would be received. It’s like releasing decisions before they are even made.
The academics are onto this too, with a focus on something called “expectations theory”. It’s not the information that matters, but what people expect it to say.
But let’s not wade into that pit…
My point is that information flows have always driven investment success. Whether it was speed, analytical power, knowing where to look, knowing who to listen to, understanding what people expect or whatever other iteration of the idea, changes in how information was captured and disseminated decided who profited and who didn’t.
Throughout most of history, it was the shortage of inflation that created the challenge. But the latest version is the opposite – too much information. Investors get exposed to a cacophony of it at an incredible pace. And their ability to sift through it defines their success.
Some traders do so by focusing purely on price action, which is technical analysis. They don’t care what the underlying investment is – a stock, a commodity or wine – they just need the price history to make an educated guess about where the price is going next.
Other investors deal with the information deluge by becoming experts in a narrow field and only investing within that field. This reduces the information flow to something more manageable. Entire careers are spent trading securities that most investors haven’t even heard of.
Why am I providing all this detail? Because how we use financial market information is about to be torn up and rewritten once more…
Like Rothschild’s pigeon mail, Cantillon’s rolodex and the Wall Street Journal’s insiders, a new innovation is about to change the rules.
I suspect the change will bring us the next great investor – the first person to figure out how to capture the new power over information flows for financial gains.
Now I know artificial intelligence (AI) is a big topic. But, so far at least, its primary innovation in financial markets has been to empower information management for people who know how to use it. (Don’t worry, we’ve solved that problem for you.)
Applying the power of AI to the information investors use to make decisions allows them to sieve through the noise to create data, process the data efficiently, analyse what it means and turn that into investment opportunities.
There is no other way to effectively and efficiently deal with just how much information is now moving markets.
But who will figure out how to leverage AI into an investment method that turns them into the next great investor?
Actually, it could be you… here’s how.
A friend Down Under recently presented on his own efforts to harness AI. Here’s a chart that he created as part of that presentation. It ranks how different AI tools that exist today can be used by investors.
The message is that the financial analysis AI is not yet optimised for investors to use easily. History is still being written on how to use AI to get an investing edge.
Perhaps it’ll have your name in it.
Until next time,
Editor, Fortune & Freedom