We All Have It Now

On the Democratization of Information

Photo: Pixabay

In 1815 a mountain called Tambora erupted on the island of Sumbawa in Indonesia.  Between 70,000-100,000 people were killed in the resulting blast that was estimated to be 150 times larger than the explosion at Mt. St. Helens.  The eruption was so massive that it changed the global climate to the point where the year 1816 is historically known as the Year Without a Summer.  However, despite its significance, the Tambora eruption wasn’t reported in The Times in London until 7 months after it occurred.

Think about that.  It took 7 months for the biggest volcanic explosion in the last 10,000 years, one that affected the global climate and killed twice as many people as any other volcanic explosion in recorded history, to become news.  If the same event were to happen today, we could have someone tweeting it within minutes and we would probably have video footage online within the hour.  This is possible because of the democratization of information.  We all have it now.  Historically, having an informational edge was worth something.  Being faster or having better access meant making more money.  Not anymore.

Just consider how long it would have taken you to send a message from London to New York throughout history.  Robert Bryce writes in Smaller Faster Lighter Denser Cheaper:

Columbus’s first voyage across the Atlantic to the New World in 1492 took more than two months.  That famous trip launched a centuries-long effort to decrease the amount of time needed to get from Europe to America and vice versa. By the 1700s, sailing ships still needed six weeks or more to make the crossing. The never-ending push for Faster led to the steam engine. By 1845, the SS Great Britain, a steam-powered ship designed by the engineering genius Isambard Kingdom Brunel, was crossing the Atlantic in just fourteen days.

Sending a message was reduced from nine weeks in 1492 to two weeks in 1845.  Yet, this paled in comparison to what happened in 1866 after the first transatlantic cable was laid.  The time to send a message plummeted to mere minutes because it enabled the telegraph, first used in 1844, to be utilized across the ocean.  Two weeks collapsed to 10-15 words per minute virtually overnight.  Graphically, you can see this if you look at the number of minutes to send a message across the Atlantic over time (note: the y-axis is a logarithmic scale):

As you can see, 1866 saw a massive decrease in sending time that was only eclipsed by the the telephone, fax machine, and eventually the internet in 1990.  However, despite the increase in speed in 1866, access was expensive as only large companies could afford to pay $10 a word to send a message.  Only those with sufficient capital could have taken advantage of this edge, but over time this became democratized too.  The same pattern of democratization happened in investing.

For example, in the 1950s you could’ve bought companies selling below their net current asset value (“net-nets“) though today these companies almost never exist.  That’s like buying a suitcase with $100,000 in it for $50,000 and all you had to do was track down the data and look.  You could have used computers in the 1970s like Ed Thorp or, as Charley Ellis pointed out, you could’ve just lived in New York to have better access to company filings.  But, then the company filings went online.  Then the computers started trading based on those filings.  Then the informational edges were gone.

This happened because the information got a little too fast.  Today you are drinking from the firehose of 1s and 0s and it is too difficult to find an informational edge because everyone else and their algorithms are also drinking from that same firehose.  As Bob Seawright so brilliantly stated:

In today’s world, information is cheap; meaning is expensive.

This is where we are.  Only those using advanced quantitative techniques have any chance of exploiting anomalies in the data.  The rest of us will need to do something else.  We went from a world of privileged access to information to a world where a single tweet can change everything.  A world where anyone can break the story, anyone can get the data, and anyone can be a media company.

If, as Brendan Mullooly points out, today’s edges are tomorrow’s table stakes, what does that leave the typical investor to do? The answer lies in a maxim from Jim O’Shaughnessyyou must arbitrage human nature.

Whether we were using fires, drums, men, pigeons, horses, boats, wires, or satellites to send and receive information, people have always been the constant.  While the technology has changed, the people haven’t.  All investing comes back to arbitraging human nature.  Why?  Because it’s in your nature to sell during a panic.  It’s in your nature to buy when everyone else is buying.  It’s in your nature to make every behavioral mistake that exists out there.

Just like we all have the same information, we all share the same innate biases.  You cannot change this.  But, you can change how you act.  The only edge that will always exist is controlling your own behavior.  That is not something that we all have.


Information is Fast, Wisdom is Slow

A peculiar trait I have noticed about humans is that they are fast to take in information, but slow to glean wisdom from it.  How else do you explain why passive investing started in the 1970s but didn’t take off until the 2000s? Or why the shift to low fee funds has only accelerated in the last decade?  As the re-phrased Max Planck quote goes:

Science advances one funeral at a time.

So be it with investing.  As the biases of investment past fade away, we will see a slow end to the malpractices that still haunt our industry.  Are you not a fiduciary?  Good luck.  Do you charge high fees?  Sayonara.  Fidelity went to zero for a reason.

The truth is getting out there and investors are voting with their dollars.  They are democratizing investing one business funeral at a time.  Why is it different today?  Because, now, the people have the information.  You can’t hide it.  I can’t hide it.  We all have it now.  Thank you for reading!

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This is post 85. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data

   

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26 Responses

  1. Anonymous commented on Aug 14

    Second graph: effected should be affected

  2. Anonymous commented on Aug 14

    Third to last paragraph – gleam should be glean

    • Nick Maggiulli commented on Aug 14

      Didn’t know that is how it was written. Only ever heard the word. Fixed. Thanks!

  3. Anonymous commented on Aug 14

    Loved the piece. As you point out, information technology has greatly benefited us all through the quick, costless disemmination of information to the point of ubiquity.

    I take your point well regarding the arbitrage of human nature and instilling your own sense of investing discipline. I’d argue that the greatest investors in the world all use this practice to vault them to their hallowed heights. Well, that and the other last real edge left in investing: time spent in quality investments. However, choosing what to do with this readily available information is the most important. Great post and I look forward to reading more.

  4. Anonymous commented on Aug 15

    Nothing ever changes but the date, the weather, and the speed of global communications

  5. Anonymous commented on Aug 17

    Fidelity went to zero because they fall back on more opaque alternative revenue sources from stock lending for example. Great publicity but not really zero

  6. Anonymous commented on Aug 22

    Seems to me that if human nature has moved the masses into essentially costless indexes, then the natural arb of human nature would involve revolving back to active management – on the expectation that the masses will SELL (the indexes during the next “crisis”), driving down the cost of stocks indiscriminately, leading to active opportunity to buy quality businesses at a great price.