The Velocity of Thought

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New York – There are three processes that must accompany any investment decision – the gathering and assimilation of information, the thought process to analyze the information and arrive at a decision, and the execution of any trades that result from this decision. In recent years, two of these processes have increased enormously in velocity, while the third has remained unchanged.

Our current technology allows enormous quantities of information to be reported and transmitted instantaneously and globally. It also allows investors to execute trades seamlessly around the clock and across the world. As far as execution and information go, we now have powers that would have been unimaginable just a few decades ago. And yet, in between the information and the execution, one must arrive at a decision by a purely human thought process. It does not seem that humans have gotten noticeably smarter or faster in recent years, and it has become increasingly difficult for investors to cope with the high velocity of information and execution. Financial professionals find such a great quantity of research and data in their inbox daily that they must skim or skip over large quantities of material.

In an era when everyone has access to enormous quantities of information (and it is assumed that any widely-available information is priced into the market), there is a real thirst for any data or analysis that is truly proprietary. Some alternative research providers (such as Cleveland Research and Assay Research) have realized this and have restricted the distribution of their research and data to a small and “select” list of clients, who are willing to pay a significant premium for this exclusivity. Whether this means access to proprietary data sets (as with Gradient Analytics) or channel checks (as with the Tiburon Group), the constant challenge is to find some information that is not available to everyone else.

Algorithmic data-mining tools (FirstRain, Connotate, Monitor110, etc.) may help to manage the flow somewhat, but it seems inevitable that the information available to the investor will only keep increasing in speed and volume, without any corresponding increase in our brain-power. Furthermore, the availability of seamless global execution will present a constant temptation to trade first and think later. Paradoxically, it does not appear that the increased access to information and execution has actually resulted in better investment returns overall. In an environment like this, speed may be the investor’s worst enemy; there could be a significant premium earned by those who take the time to learn about a business in great detail, from the bottom-up, before making any decision. Therefore, in spite of an observable drop in popularity with PMs, we remain skeptical that traditional, fundamental research has been outmoded by recent technological developments.

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