May 10, 2017
If you live in Atlanta—especially since the I-85 bridge collapse—or any other major metropolitan area, chances are you have experienced the frustration of rush-hour traffic. Aside from the handful of locals who always seem to know a more efficient, “secret” route, many of us endure the gruel of rush hour, longing for a better option. The advent of GPS and myriad apps promised the Holy Grail for commuters: suggestions of alternative routes promising less congestion. Many of the most-lauded apps are based on crowdsourced technology. Crowdsourcing enlists large numbers of people to obtain information; with respect to traffic, people report the locations of accidents or slowdowns, and the apps calculate more effective or efficient routes.
In investing, a fundamental principle is the notion that some companies are financially more attractive (or better run) than others. However, each of us has our own definition of “financially attractive” (e.g. low relative price-to-earning ratios or superior cash flow), which creates a tug-of-war between buyers and sellers. Before the proliferation of technology, investors had to scour financial publications for information, contact company representatives for facts and opinions, and analyze all the data to ascertain a “fair” price for a stock or bond. This took extreme amounts of time, effort, and training, and in the end, the best analysts were rewarded for their initiative. In essence, there was a premium for information and experience.
Today, however, this same information is available in near real-time to anyone with internet access. Technology has discounted any competitive advantage that a Wall Street analyst once commanded and, as a result, has diluted an investor’s ability to profit. The rise of passive investing is a direct result of this timely, increased flow of information. For many, active investing in stocks and bonds is now proving too costly after fees, transactions costs, and taxes.
So what are the common threads in both traffic and investing? Technology and access to better information. While both have increased the dissemination of meaningful information, this concept, by its very nature, ultimately renders itself useless—in traffic and investing.
Let’s look at traffic. A big wreck occurs on Georgia 400 during morning rush hour. Those who are nearest (but not too near!) the accident and are forewarned have time to get off the interstate and onto surface streets. Within just a few minutes, however, all those app users traveling on 400 are notified and are also flocking to surface streets. Given the increased volume, along with MARTA bus stops, stoplights, turn-only lanes, etc., surface street traffic often ends up as bad as—or sometime even worse—than the original route.
Similarly in investing, quarterly earnings are announced in real-time on CNBC, and investors can attempt to purchase the stock before the market reacts to the newly minted news. However, much to their dismay, the price of the stock already reflects this information. The old adage on Wall Street says to “buy the rumor, sell the news.” The idea being that by the time the information is widely disseminated, it is too late to react because a faster, more adept investor beat you to the punch.
In other words, once news of a better option becomes available, the only people to benefit are those with the fastest access to, and the ability to act quickly upon, that information. By the time most people can reasonably react, the opportunity has likely passed. What’s the better option for your drive home? Consider saving yourself time and money with passive commuting, similar to the way passive investing has proven successful for many investors. Save the active commuting—and investing—for opportunities that truly warrant the extra effort.