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David D. Kirkpatrick and Jamie Heller

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from: Jamie Heller

Too Much Information

Posted Monday, May 22, 2000, at 12:26 PM ET

David,

Glad you chose to write about the Berenson article, which I thought was the best thing in this Sunday's New York Times.

It seems you and I read into his piece different conclusions. My takeaway was that the information deluge is making the markets less efficient, not more. With so much competing and conflicting information from an ever-widening array of sources, it's increasingly difficult for a consensus to take hold. In other words, it's not that the market efficiency is keeping pace with the rapid information flow. Rather, in the increased absence of efficiency, prices scatter.

For an example in practice, take the B2B phenomenon. That got legs so quickly that we at TheStreet.com almost missed it, as did many investors! Shortly after we jumped on it, it lost its oomph. (We are still covering B2B.) Essentially, with massive information overload, consensus is elusive, and prices jump about accordingly.

A few other points. To your comment that people who buy stocks just because the prices will go up are jokers, I say, they're OK by me if they make money. Making money is the only reason to be in the stock market. For those so inclined to be "momentum" traders, my hat's off to them if they can succeed at it.

Also, just because the market is volatile doesn't mean a pension or mutual fund manager has to follow suit. Index funds, for example, have very little trading and, in turn, few costs for investors. Investors who select active managers, especially ones prone to lots of trading, choose higher costs with their eyes open.

Finally, for the record, Alex Berenson came to the Times from TheStreet.com. We're proud of our offspring!

OK, on another note, any thoughts on the New York Post article on the mutual fund industry today? I thought the usually prodding Post was a bit easy on the industry here. Essentially, the industry opposes the proliferation of "Internet-based investment advice"--whatever that is--as something that will "harm investor interest." This, from an industry that has repeatedly underperformed the stock market?

the breakfast table
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from: Jamie Heller

Too Much Information

Posted Monday, May 22, 2000, at 12:26 PM ET
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David D. Kirkpatrick is a contributing editor at New York magazine who writes frequently about business and finance. Jamie Heller is editor for strategic ventures at TheStreet.com, where she's worked since its 1996 founding.
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Reader Response from The Fray--to be read after the most recent entry:


I still don't understand how the stock market can be efficient in the long term and not the short run. And I'm not relying merely on Keynes' famous sentiments about the long run; my point is even simpler: when is the long run? Was Microsoft's long run value from 1990 to early 2000 or to today? Short run volatility must have consequences for people who claim long run efficiency. To my mind, and for many other reasons, believing in efficient markets is like believing in Santa Claus--there are correlations between expected results and reality, but people really ought to grow up and accept that no-one on Wall Street knows anything.

--Jeff

(To reply, click here.)

(5/22)

To Jeff: Various natural processes are long-term efficient without being short-term efficient, for example the downhill flow of water or the process of natural selection (aka evolution). Complex human processes seem to have similar behavior. Perhaps efficient is being confused with "optimal". The problem with most strategies that attempt to be optimal is that they often have truly horrendous failure cases, which wipe out all their interim or theoretical gains. Democracy has been called "the worst form of government, except for all the rest." It is hardly optimal, and in many cases very inefficient. A dictator could get the graffiti cleaned up and the trains running on time; democracy seems to have a hard time doing such things. But what about the failure case of a less-than-benign dictator or a dictator whose benign intentions diverge from many or most of the desires of the population? An example of short-term efficiency vs. long-term, in terms of human happiness.

That's not to say short-term efficiency is bad, or that we can't improve on raw systems. But it is possible for a strategy to be the best long-term one without exhibiting short-term efficiency.

--Paul Canniff

(To reply, click here.)

(5/23)

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