Investing in The Age of Big Data: How To Navigate Expanding Sea of Information
April 1, 2021
Investors living in the digital age have a seemingly unlimited amount of information available at a moment's notice. With an abundance of information, it would seem investors have it easy when selecting stocks or planning for retirement, whereas our grandparents had to walk uphill both ways, in a blizzard, just to get to the library. It turns out that investing in today’s world is as challenging as it was 50 years ago — just in different ways.
The same thing but different
Back in the day, investors like Warren Buffett would gain an edge by parsing through the information that took an effort to compile — an effort that the general public would rarely undertake. This advantage allowed investors to analyze data and trends that were all “publicly available” but relatively hidden and difficult to access.
For example, someone interested in Sears stock during the 1960s may have needed to send a request letter to the company for an annual report. In a few short weeks, like magic, the requested documents would show up in their mailbox. Good luck if you needed to follow-up, as that might be another month waiting for more information. It wasn’t impossible, but those willing to put in the time and soak up basic information on trends and sales figures had the edge over the average investor.
Today though, that information edge has all but vanished. There are countless high-quality websites and forums devoted to financial metrics, strategies, trends and analysis. It has only amplified during the pandemic. What made a superstar analyst in the 1980s would barely pass as an intern in terms of the ability to capture and regurgitate information on a specific company today.
The big data dilemma
As information has become more abundant and closed the gap with old-school research, investors seek opportunities to gain an edge. The problem isn’t the lack of data, it's too much data. Big data, as it's known, is a term that references the increasing amount of digital material we generate, store and interpret. There are distinct advantages to big data, namely the opportunity to extract otherwise hidden patterns or unseen trends. The darker side to big data, particularly in finance, is that investors are barraged with too much input and not enough time or tools to interpret the data effectively. This can lead to less than ideal outcomes, especially for someone investing for retirement.
What’s the problem?
Big data can skew realities and lead investors astray. Someone may think they are purchasing a less risky stock than they are due to misinterpreted or confusing data. It may also be difficult for an investor to drill down and find actual trends, such as “housing starts,” which refers to an economic indicator reflecting the number of privately owned new homes on which construction has begun.
A search for the term “housing starts” returns over 39.6 million results (in 0.75 seconds), and news articles at the time of writing have headlines indicating the metric has fallen over 10%. That may lead investors to think housing is slowing and may take them down a different investment decision path. The broader data shows that housing starts are higher than at any point since 2008, suggesting that the 10% fall was just a slight cooling off of an otherwise very active market.
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Big data is here to stay
With the ever-expanding universe of cloud computing, big data is here to stay. Investors can navigate the frenzied ocean of information by focus, awareness and interest. Speaking with an investment advisor may help structure your throughs and goals and allow you to focus on the questions you should be asking versus letting the data do the guiding.
Awareness is key for individual and institutional investors alike. Ensure you know and trust the data you are sourcing and cross-check with other sources to see how they compare. Lastly, taking an interest in the data helps tease out suspect reporting. Ask tough questions until you feel more comfortable with the data presented. We are investing in an incredible digital age, one that can help or hurt us depending on how we decide to use data, and ultimately the old saying remains true: “Knowledge is power.”
Grant E. Stark, CFA, is director of research at CapWealth Group. He co-manages CapWealth’s investment strategies and develops the firm’s investment policies.
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