Signal and Noise
No, Markets are Not Efficient
The accepted theory is that markets are efficient. This means that all known / knowable information is reflected in an asset’s price at all times.
Let’s use Apple (AAPL) as an example. There are 39 analysts at Wall Street banks who cover the stock. There are countless other bloggers and reporters who write about Apple everyday. On top of that, it is one of the most widely owned stocks in the world, meaning there are numerous analysts at investment managers who follow the stock as well. Given this, what are the odds that one person will uncover some “nugget” of information about Apple that the world does not already know? Fairly small. It is safe to say that all legally knowable information is reflected in the stock’s price. We are not talking about insider trading here. In that case, there is always information that is not known by all.
The thought is that since markets are efficient, they can not be beaten. Meaning it is futile to try to invest in such a way as to achieve a return that is better than what you would get if you just bought an S&P 500 Index fund. Now, I could not disagree with this statement more. I also completely disagree with the way that an inability to beat the market has become almost like a dogma among some market participants. This is a rant that could go on for a long time but I am not going to do that here. Instead, I am going to walk through an example of how markets are not perfectly efficient (I actually believe that markets are mostly efficient, just not perfectly so).
Remember when I said “pay attention to has the attention?” Well the case can be made that Elon Musk has attention. On January 7th, he put out a simple tweet.
On Sunday, Naval Ravikant, who is an angel investor and all-around rock star in the venture capital community, tweeted something similar.
What are these two well-followed, technology-centric gentleman talking about? Signal offers, according to their site, a state-of-the-art end-to-end encryption (powered by the open source Signal Protocol); keeps your conversations secure. We can't read your messages or listen to your calls, and no one else can either. Privacy isn’t an optional mode — it’s just the way that Signal works. Every message, every call, every time.
I actually went to download it over the weekend and saw that I already had it, back on the third page of my iPhone. Then I remember that a former client of mine, a hedge-fund manager, told me about it a few years ago. I checked it out but no one was using it so I let it slide. The fact that Signal encrypts the messages and calls is big selling point for the app right now. In fact privacy is a word we are going to hear a lot this year. The catalyst for change in messaging apps was the news that Facebook uses the data that they have on What’s App users in order to better target their ads. This is good time to remind you that if the product is free, then you are the product. And make no mistake, every time you pull up a social media app, YOU are the product! But that’s not the point.
The point is that these two tweets, from Elon and Naval, were enough to send a previously unknown stock up by 340% at one point yesterday. Actually, it was more than 600% but I missed the screen shot on that tick.
Now, before you rush out to buy SIGL, the hot new stock of the company which makes the app that all the Silicon Valley tech titans and NYC hedge fund managers are using, do some quick research. Signal Advance Inc. is described as an engineering product and procedure development and consulting firm. The Company is focused on the development of applications for emerging technologies. The Company has capability in computer technology, distributed information systems, signal detection and generation, data acquisition and analysis systems, as well as, intellectual property protection and medical-legal litigation support. The Company's signal advance technology (SAT) is used in a range of medical applications, including cardiac rhythm management (CRM), neurostimution/neurotherapy; prosthetic/neural (brain-machine) interfaces, artifact detection/correction and gated imaging and radiotherapy. SAT is also used in a range of industrial applications, including manufacturing/process control, communications, transportation, military/defense and energy production.
They have nothing to do with the app that is currently all the rage. In fact, it seems that the rally in SIGL started on Friday prompting this tweet from the “real” Signal
Yet the “fake” Signal was still up more than 600% on Monday even after this information was in the market.
Please, tell me again that markets are efficient!
Nothing in these pages should be considered investment advice. Please do your own research.