“Simplicity is the ultimate sophistication” – Leonardo Da Vinci
In what can only be described as the age of “big data,” it’s not uncommon to feel as if our TV, smart phone and even our wristwatch are bombarding us with news, information and opinions 24 hours a day. How do we handle the new stream of consciousness? Has our culture stopped valuing the art of “simple and elegant?”
Information can bring education, cooperation and greater understanding. But this is a double-edged sword. It can also come with greater confusion and complexity. In investing, the search for the Holy Grail can lead you to complex, opaque strategies. Complexity can lead you astray of what’s important and what really matters. Of course, there is an incentive for many Wall Street and financial services firms to make investing seem complicated. In truth, the complexity of some investment “products” provides greater cover for overpricing.
The simple, competitive nature of the publicly traded market creates an efficient pricing mechanism that proves, over time, difficult to beat. This is the underpinning of recent Nobel Prize winner Professor Eugene Fama’s ‘efficient market hypothesis,’ which states, “In an efficient market, at any point in time, the actual price of a security will be a good estimate of its intrinsic value.” In other words, because of all the competition for information and the speed at which news is incorporated into stock prices, the current price is the most accurate one. The extra time and effort that goes into trying to beat the market leads to increased costs and complexity. All of these factors, in conjunction with one another, help explain why the majority of professional investors don’t beat their respective benchmarks.
As a starting point, assuming that markets are more efficient than not lets the market work for you. Tune out the temptation to use ‘big data’ as a means to gain an edge in investing. Steer clear of overly complex, expensive and illiquid strategies that will more often than not, disappoint.
Information is all around us, disseminated every second around the world. In fact, over half of humanity’s data has been created in the past year. While this can be a good thing in many respects, the temptation to quickly act on it within your investment portfolio is folly.