31/07/2007 - 22:00

Distilling the facts from noise

31/07/2007 - 22:00

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Knowing a lot about the companies in which you invest is a good thing. The problem, as we are all discovering, is knowing whether what you are being told is correct, and whether you are being told too much.

The internet, perhaps more than any invention, has empowered the most humble human with a vast volume of facts and figures – but not necessarily wisdom. For that we still rely to a great degree on instinct.

A series of events sent Briefcase down this road of comparing information with knowledge.

We are, for example, loaded to the gunwales with facts about the conflict in the Middle East, but do we necessarily know the truth about why it’s happening?

We are also drowning in stock market data about profits, share prices and forecasts, but does anyone really know the full picture of what’s happening on the market, or who to believe?

Distilling the flood of ‘facts’ into a simple, usable, package is undoubtedly the next great challenge for the information technology boffins. It’s the issue that will do more than most to separate the different players in the media world, and to separate winners from losers in the investment world.

In the world of media there is already a fascinating split emerging between the purveyors of bulk, and the distillers of what it means.

The London-based website www.breakingviews.com is a taste of what’s to come. It makes no attempt to report on everything that’s happening on the world’s markets, and is even snobby in that classic British manner by billing itself as offering relevant, timely opinion to “the world’s financial elite”.

There’s nothing quite like it in Australia, yet, but you can bet the house on a local version arriving on a screen near you soon.

•••

What BreakingViews and its copycat cousins are doing is cutting through the wall of data and explaining what it means, quickly, and in simple English.

Just how important that is, and why Briefcase reckons it will be the next hot thing in the financial world, was illustrated in a recent analysis of business information in The Economist newspaper.

•••

To highlight the point about there being too much noise and not enough light a staff member at The Economist watched a Reuters screen at a particular time of day – 1.16pm on July 11.

In that minute (yes, one minute) a total of 21 headlines appeared on the constantly rolling screen.

Users of Reuters screens know precisely the point being made by Briefcase. There is absolutely no way any human can absorb and understand news event in the three seconds allocated to each headline – and remember this is roughly what’s happening every minute of very day.

As New York takes over from London with its flood of financial facts, figures and mumbo-jumbo, it is possible that a reader gets even less than the full three seconds.

What you see on a Reuters (or Bloomberg) screen is noise.

There is no time for anyone to digest what has just flashed past, or to assimilate the latest events with what is already known, and understand what it means to the long-term picture.

For that, an entirely new form of financial media is evolving, along the lines of BreakingViews, where the key to success will not be knowing everything, but in the trust that develops between the consumer and the provider.

For the people running traditional media products such as newspapers this presents an enormous challenge. On the one hand they are faced with increased competition for advertising dollars from the internet and are cutting costs accordingly. On the other they are losing readers because they have cut costs and dumbed-down their product by replacing expensive (older?) staff with cheaper (younger?) staff.

Briefcase can understand the financial imperatives driving this cost cutting, and the rotation of old for new, but gets immense pleasure from knowing that the cheaper/younger staff being recruited by old media outlets will not stay long because the ‘internet grass’ is a lot greener.

•••

If the information flood is drowning traditional media it is having a slightly different effect in the investment world, where the pace of change, more so than the volume of information, is causing great angst.

Right now the big issue in business is pricing risk.

Thanks to clever US investment bankers, we have seen the creation of complex financial structures such as CDOs (collaterised debt obligations). It is these beasts which have triggered a global financial crisis.

For non-followers of recent events (and they do happen quickly), a CDO is a pile of dodgy debts, such as mortgages issued to poor people who can’t meet their monthly payments, bundled into a single financial instrument and then sold on the basis that the good parts of the bundle will outweigh the bad parts.

In theory, in buoyant financial times, with rising asset values, and stiff wind at your back, this system might work.

In practice, bad debts in a bundle are like the bad bits in an egg – they cause the whole thing to turn rotten.

What does this problem in the US mean for Australia? It means the price of debt will rise, as will interest rates. Cash will be king (for a while) as values are adjusted, and investment funds withdrawn from the market until a clearer picture emerges.

For a few unfortunate investors, and deal-doers, this means very rough weather ahead, and a time to consider your options.

The Wesfarmers/Coles situation is a case study of being in the wrong place at the wrong time. And while those aboard the deal argue that all’s well, Briefcase, from past experience, knows that it’s not because at this time of a market cycle those in a risky position get hammered.

•••

A final thought on a completely different subject; jury duty.

Last month, Attorney-General Jim McGinty lamented the lack of willing volunteers to serve on juries. Briefcase shares his concern but is staggered by this latest example of government believing it can order people to provide a personal service.

The problems with jury duty are manifold. Rising levels of self-employed workers is one, which means jury duty forces a person to sacrifice his or her income for a pittance.

Another is the willingness of courts to overturn jury verdicts – translated that sends a very clear ‘what’s the point’ message.

Then there’s the time factor. Who, in a high-speed world, can commit to a process that could last weeks, or months? Worse still, no-one can tell you how long the commitment might be before your start.

Sorry Mr McGinty, you have an intractable problem, and one Briefcase suspects is going to get a lot worse if people are coerced by government, with threats of punishment, to do something they don’t want to.

How, for example, can you expect to get the correct result from a jury made up of people who are disinterested in being there, not really listening to the evidence, and doing their day job before and after a day in court, and then nodding off in a jury box.

•••

“Life to the great majority is only a constant struggle for mere existence – with the certainty of losing it.” Arthur Schopenhauer

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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