They raise a couple interesting points, known to our readers but laid out very succinctly:
1) If you react to each and every headline dropping out of your fancy low-latency, machine-readable feeds you will worry yourself sick and not get anything done.From the BlackRock blog, June 4:
2) Intertemporal arbitrage.*
Rick Rieder and Russ Brownback argue that there’s little benefit to “trading the news” today, as prices adjust instantly to highly-transparent information. Rather, investors would do well to follow long-term cash flows, of which the lion’s share is to be found in tech.
Ignore market noise and look to longer-term fundamentals
Roughly a month ago, on May 5, investors awaited news of a sweeping U.S./China trade deal, but instead President Trump shocked the world by announcing the implementation of incremental punitive tariffs, signaling an apparent breakdown in negotiations. When U.S. financial market futures opened for trading several hours later, the news was instantaneously reflected in market pricing, leaving little opportunity for investors to “trade the news.” This phenomenon, which we term “discontinuous pricing,” has become a persistent market theme over recent years (see first graph), as the real-time dissemination of every bit of market-moving news has squeezed the alpha generating capabilities from those investors who traditionally relied on reacting quickly to profit from an “information advantage.”
Rapid news dissemination and discontinuous pricing inhibits “Trading the News”
Fortunately, a straightforward solution can be found in this world of information hyper-transparency, which is that successful investing actually means that people need to invest again, as opposed to trading news flow. Thus, the most effective portfolios are aligned to the large structural influences that are playing out across the global economy and that will drive the growth and distribution of future cash flows. Of course, we make some allowance for incrementally tweaking positions based on the headlines, and for hedging against extreme outcomes, but in short: longer-term cash flow is more valuable than news flow.....MUCH MORE
Accordingly, we place great emphasis on how the world’s major contemporary “battle-lines” are being drawn, and not surprisingly they are in the locations where future economic value is thought to exist, which is similar to historical experience. As a case in point, the wars of long ago often revolved around control of necessary resources: land, food and water. Later, the colonial wars of independence and revolutions, up until the early 20th century, can be seen as advanced versions of the same theme – a battle for trading routes, spices, vast tracts of arable farmland, and lastly industrial commodities. More recent history has seen numerous Middle Eastern conflicts, which isn’t surprising, given the incredible global reliance on oil. And since this region controls a third of global oil production, and can act as the world’s swing producer, the involvement in these wars by the world’s largest consumer (U.S.) was also no surprise. The arena for the “wars” of today and tomorrow, however, will be quite different, but the conflicts will continue to center around perennial themes of national wealth and economic potential.
Trade dispute not about soybeans, or natural gas: It’s all about tech
While some wars will still emanate from the energy patch, given the trillions of dollars of residual value that remains in oil, the future geopolitical conflicts will be explicitly technologically-oriented; around such topics as global spectrum usage, 5G connectivity, etc. Given the vast and indomitable value that is at stake over the future of technology, how it evolves, and to whom that value will accrue, it should not be surprising that this would become the next site of political and economic conflict. Indeed, the cash flow generation potential of these capabilities is seemingly limitless considering their asset-light business models, nearly immediate global penetration, and the invaluable services they provide to global consumers. The current trade disputes between the U.S. and China are, of course, at the epicenter of the battle. A harbinger of things to come can be seen by the fact that China’s imports of integrated circuitry have finally outpaced that of industrial commodities over the past decade (see second graph). Further, the stakes could not be greater for investors, for the appropriate positioning of their portfolios going forward, and for the need to embrace these big-picture realities, which is vital for success in markets today.....
*"How human traders will beat the machines"
*****
I know I think about time-shifting more than the the average person.
Okay, truth be told, despite a predilection for really fast 'puters I obsess about outsmarting the machines.
I mean what normal person types this headline "'Facebook, Google, and the Economics of Time' (FB; GOOG)" and follows it with this opening sentence: "Although this story is not about intertemporal arbitrage I'm sure that's the first thing some of our readers thought of."
Or gets giddy with "Intertemporal Arbitrage: 'Winning Big by Playing Long-Term Trends" (CNI; PNR)?
So be it.
See also the introduction to 2013's "UPDATED--The Economist On How the Commodity Quants Lost It:
...The bolded bit points up one of the failures of the fund managers.They get paid to figure out the intertemporal arbitrage, a fancy way of saying the task at hand is to understand the time period that gives the fund the greatest advantage versus the market..
The classic example is the individual investor realizing that he can't compete with HFT and looking at longer than nanosecond time periods. This opens up the possibility of not just not-competing with the traders with the lowest latency but of taking advantage of mispricings caused by their behavior. This is exemplified by one of Buffett's baseball metaphors (he has quite a few):
"In investments, there's no such thing as a called strike. You can stand there at the plate and the pitcher can throw a ball right down the middle; and if it's General Motors at 47 and you don't know enough to decide on General Motors at 47, you let it go right on by and no one's going to call a strike. The only way you can have a strike is to swing and miss."Now for a fund manager it get's tricky writing the quarterly report and saying "We didn't do much in Q3, we're waiting for Mr. Market to give us the high hanging curve ball" but if you've been honest with the investors that the tactic you've pulled from the toolbox is akin to the military's hurry-up-and-wait sense of time it is doable.
The point is, you don't have to be at the market every second You are afforded the luxury of just waiting for the perfect pitch.
As a side note anyone who considers a move that is measured in weeks to be a trend is nuts. A trend is John Templeton going into the Japanese markets at 2 times earnings and catching a 40-fold move 1965-1989....
