I had a money manager say something to me the other day that struck me as odd—so I thought I’d dig in a bit to see if I can rationalize his comment. He said, “We are all using the same data” when I asked him about an opinion that I heard from someone else about the stock market over the next few months. His basic point was that the market is about valuations & fundamentals” (more) and significant deviations from intrinsic value are rare, and markets usually revert rapidly to share prices commensurate with economic fundamentals. Therefore, if you use tried-and-true analysis of a company’s discounted cash flow to make your valuation decisions you will be fine over the long run.
I think the most important thing he said was “over the long run”. Because some investors do have access to fundamental data (private feeds) that others don’t and if a proprietary feed is faster and gives the investor a ‘speed advantage’ in trading then that is an unfair advantage. For example, if the price of a stock goes from $100 a share to $95, and you know that and someone else doesn’t, it makes sense to sell at $100 to a buyer when the investor knows the price is now $95. If you are a high-frequency trader and you know prices are changing millions of times a day across many securities, you can make a great deal of money.
“…our system for telling investors what stocks are worth should be straightforward. Instead, we have created a two-tier system of stock-price information—a lower-quality public feed and generally higher-quality private ones.” Commissioner Robert J. Jackson Jr. (more on Public versus Private feeds)
Some investors also have access to “alternative data” like satellite imagery to analyze information such as parking lots, web scraping to track items such as consumer preferences and geolocation data to analyze information such as consumer traffic to certain stores. With tools like Artificial Intelligence/Machine Learning the new Quant 2.0 Wall-Street geniuses can take proprietary fundamental feeds and these new alternative datasets and do Algorithmic trading to uncover value faster than any old school hedge fund manager (example).
But at the end of the day, you don’t have access to any of these tools… So, if you can suffer through all the volatility and you trust that your money manager is on top of your portfolio’s underlying fundamentals then yes, the market can still work for you over the long run. However, just know that many strategic investors will have made a lot more money than you, on those same investments, by leveraging better tools and quant 2.0 type talent.
…you can throw all this long term investing out the window if you have a mere $7.5 billion to invest and then Bridgewater Associates can do it for you and you will likely do very well.
While the Quant’s and AI-powered algorithms can crunch numbers and make an investment decision, they can’t offer the human touch and it has become evident to me that the human touch is an essential component to long-term investing—net: you need a coach to get you through the stress of the volatility–get a good money manager.
Footnote: and never forget that you need to respect market sentiment.