The Most Valuable Commodity

Gordon Gekko may have been from the Bernie Madoff school of investing, but his quote from the 1985 film Wall Street holds up: “The most valuable commodity I know of is information.”

Fast forward thirty years, and the explosion in the amount of readily available information hasn’t necessarily reduced its value, but it’s made it critical to have a reliable and time-tested approach for processing it.

Make no mistake: as an investor, you are nothing more than a processor of information. The better and more efficiently you process information, the better your risk-adjusted returns and the more consistently you can earn them. Being a great processor of information comes down to being a combination of Jack Daniel and Eckhart Tolle.

 

The Basics

Financial markets are simple information-discounting mechanisms, where price is the messenger but not the message.

However, in traditional finance theory, information is treated as a generic item. This traditional approach implies that all types of information impact all investors equally, which is categorically incorrect.

In reality, financial markets are made up of different types of investors, all of whom make decisions based on different time horizons. A given piece of information has varying impact depending on the type of investor evaluating it and over what time frame.

This variation in processing and valuing of information is key to keeping financial markets liquid and mostly stable.

 

You Must Distill Like Old No. 7

In this day and age, the most critical component to processing information more effectively is knowing what to digest and what to ignore. You need to follow in the footsteps of Jack Daniel and become a master distiller, but of information.

For instance, many investors get worked into a lather about the monthly U.S. ADP employment and non-farm payroll numbers. These reports are important, but they are lagging economic indicators and are also heavily revised after the fact. Not to mention that weekly unemployment claims have historically provided a much more accurate picture of the U.S. labor market.

I won’t geek out and bore you with talk about information ratios and the like, but I can back up my perspective statistically. Furthermore, whenever more than half of U.S. states have seen weekly claims over an annual rate of 20%, a recession has followed. If you are a “recession watcher,” don’t worry; there are almost no states currently with claims in excess of 20%.

I’m not trying to imply that you need to get a Masters in Statistics and back-test every economic indicator across the world to determine which are important. It’s simply a matter of finding information sources that are consistent, objective and allow you to articulate a detailed perspective of financial markets.

 

The Power of Now

Another critical component to better information processing is to channel your inner Eckhart Tolle and focus on now. Stay with me; I’m not going to launch into a diatribe about mindfulness. But what I can tell you is that if you focus on better understanding what is happening right now, you will see both opportunities and risks that most market participants miss. Focusing on now helps you better handicap the probabilities of various scenarios in the future.

This “now” approach is in stark contrast to most investors, who are either looking in the rearview mirror at three-month-old data, or are focused on forecasts in an effort to predict what will happen months in the future. Processing information effectively is not about forecasting the weather for tomorrow, but instead about noticing if it’s sunny or raining today.

Just last week, investors were caught driving while looking in the rearview mirror when the initial estimate of U.S. Q2 GDP was released. Folks, we are a third of the way through Q3. Who gives a rip what happened in Q2?! Not only is this data point as dated as my last relationship, but it’s also going to be revised 700 times over the next six weeks. Q2 is in the history books, so you need to turn your attention to Q3 if you want to position yourself appropriately.

This week, we receive our first glimpse of Q3 (July) data. Allow me to give you a sneak peek into what you can expect, using my proprietary U.S. growth indices.