Permanent Value

Week In Review

Bruce Doole
January 28th, 2013
THE MARKETS

THE WEATHER AND THE STOCK MARKET HAVE A LOT IN COMMON!

They’re both very unpredictable! The stock market has a habit of surprising investors with its ability to rise or fall dramatically in short periods of time. For example, remember the “Flash Crash?” On May 6, 2010, the U.S. stock market plunged for no apparent reason and briefly erased $862 billion from stock values in less than 20 minutes, according to Bloomberg. It then quickly rebounded.

As it relates to weather, we always know what season we’re in. One look at the calendar tells us whether its winter, spring, summer, or fall. And, depending on where you live, you have a pretty good idea – based on history – of what to expect for each day’s temperature. But, just like the Northeast experienced, you can have an “out of season” experience that messes up your best-laid plans.

The stock market doesn’t have four seasons, but it does have bull and bear markets, which are further divided into secular and cyclical. Market analysts have some general criteria that they use to categorize the markets into these buckets. Yet, like the weather, you could be in a bull market, but still have a nasty market drop that temporarily derails the path of the bull.

Bottom line, just like weather forecasters, market analysts may have a sense for general conditions in the market, but surprises still happen.

WEEKLY FOCUS – THINK ABOUT IT

WHAT DO DOTS HAVE TO DO WITH BEING A BETTER INVESTOR?

In his fascinating new book, Imagine: How Creativity Works, author Jonah Lehrer describes the creative process and what steps we can all take to be a little more creative. One of those steps is to talk to more people and expose yourself to new situations. By “colliding” more often with people who are not like you and throwing yourself into new environments (like a foreign country), your mind will come up with more new ideas than you could have thought of on your own.

And, while business owners may not like this, Lehrer’s research suggests, “The most important place in every office is not the boardroom, or the lab, or the library. It’s the coffee machine.” It’s those casual conversations with colleagues that generate new interactions and spark ideas.

This leads to an important point about investing.

Brian Uzzi, a professor at the Kellog School of Management, studied the instant messages (IM) sent by traders at a large hedge fund over an eighteen-month period. As reported in Lehrer’s book, these traders sent more than two million messages over that period and the average trader was involved in 16 different IM conversations simultaneously – talk about multitasking! Essentially, these traders were rapidly communicating with each other and trying to make sense of the latest news so they could profitably trade on it.

As summarized by Lehrer, Uzzi concluded, “The best traders were the most connected, and people who carried on more IM conversations and sent more messages also made more money.” Further, Uzzi said, “The act of investing is like solving a difficult puzzle. These traders are trying to connect the dots. Because the traders are listening to their network, they manage to accomplish what they could never have done by themselves.”

In essence, successful investing partly relies on “connecting the dots” of information that bombard us. While we’re not day traders like the people Uzzi studied at the hedge fund, the concept of connecting the dots still applies – albeit on a much longer timeframe. And, to connect the dots, we have a large network of colleagues who can help us separate the daily noise from what’s truly meaningful.