AKTAR: EMH can help Average Joe have advantages, too
Opinions Column: Global Macro
In any competition, somebody has to win. In some cases, more than one person does. Investing is like any other contest: There will be winners and losers, always. But the Efficient Markets Hypothesis (EMH) tells us that market prices reflect information, and that there’s no way to know more than the market does. And as true as that is, for EMH to work, someone has to introduce the new information into the market, someone has to be the first to know and someone has to win.
As nice as it is to know that EMH leaves room for winners, it is prudent to remember they are the ones who move faster than everyone else. But then — as long as you keep up with the news — there’s a chance that one day you’ll count yourself among the lucky few, right? No, never.
The information you consume doesn’t matter — it's days, sometimes weeks behind the best investors. And this isn’t because you subscribe to a sluggish news source (though that may have something to do with it). It’s because the smartest people aren’t worried about what’s happening today. They’re working hard to know what’ll be happening tomorrow. And they aren’t consulting fortunetellers.
They’re consulting the stars — actually satellites, the manmade kind. But it’s not Google Maps that they’re looking at. They’re buying daily images from companies like Planet. These firms are a new type of space explorer, one that operates on investors’ dimes and for a profit. And both they and their backers have realized there is a pool of limitless cash interested in what they have to offer. The data gathered from these tiny satellites can help talented fund managers track oil shipments, understand global crop yields — and if they’re interested — watch Russian troops march toward Ukraine. And, if they’re bored, they can watch storm clouds instead of shipping lanes. That, too, will probably make them money.
But a market for eyes in the sky isn’t the only innovation helping the best investors maintain their leads. Active equity shops aren’t only worried about oil and grain supplies, but they also care about you and your feelings. Twitter data helped fund managers get ahead of Brexit, despite polls indicating the opposite outcome. Google searches can tell an advertiser that you’re interested in their product, but they can also help a savvy research team determine whether you’ll be buying it or not. Seemingly mundane data like the number of mortgage applications, the area in which they were initiated and housing supply in the same zip code doesn't tell the average mortgage broker anything, but when viewed on a national map these data can tell a smart investor which housing markets will be up. But that’s just the short-run implication. An even smarter person will know that more housing demand will lead to construction and a need for builders’ loans. And they’ll line up that financing before anyone else knows there’s a need for it. That’s not all though. They’ll go further and expect a rise in local furniture and home goods purchases, and they’ll start watching department store parking lots in the same areas. And this last bit will let a portfolio manager know what direction a quarterly earnings report will lean a few months ahead of the retail investor.
This isn’t a new phenomenon, though. Information and the speed by which it’s delivered has always been a concern for people trying to beat the market. Spend a few minutes with Michael Lewis’ "Flash Boys," and you’ll know that decades ago the race for information was already underway. Enroll in Professor Eugene White’s "Financial and Monetary History of the United States," and you’ll learn that since the founding of the United States, traders have been trying to get a leg up on their competition, whether it be by nighttime messenger rides, smoke signals, mirrors or fiberoptic cables.
Both then and now, playing on that level meant achieving scale — meaning hundreds of millions of dollars’ worth of infrastructure or its equivalent. But the future’s not that bleak, even if you can’t see it. As launching a satellite gets cheaper, and open source data sets allow anyone with an internet connection to have the same data as the best hedge funds within milliseconds as the people who pay for it, perhaps one day an average Joe can win too — as long as he knows how to write a machine learning algorithm and has access to a server the size of Renaissance’s.
Fahad Aktar is a School of Arts and Sciences senior majoring in economics with a minor in political science. His column, “Global Macro” runs on alternate Wednesdays.
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