Too Much Information Investing

In January of 2020, Senators and Congresspeople had a secret meeting. The topic of discussion at this meeting was the outbreak of a virus. According to top officials and experts in the field of virology, this virus was unlike anything seen in the past century. It was highly contagious, with deadly effects, especially for older populations.

The ramifications of this news were clear to see. A virus that prevented people from interacting with one another in the physical world spelled certain doom for the global economy. So with haste, these Senators and Congresspeople took action. That is, they made haste in liquidating their assets, not formulating a plan to help their nation and constituents.

In a show of bipartisan unity not seen in years, Republicans and Democrats alike sold their stocks in droves, far more concerned about cashing out before the market crashed than notifying their electors of the impending danger.

Kelly Loeffler, a Republican from Georgia sold $1.2M worth of stock.

Not to be outdone by her Republican counterpart, Democrat Senator Dianne Feinstein of California, sold $1.5M worth of stock in the months preceding public awareness of COVID.

When Loeffler was confronted on this issue she replied “This a ridiculous and baseless attack. I do not make investment decisions for my portfolio. Investment decisions are made by multiple third-party advisors without my or my husband's knowledge or involvement.”

I don’t know what’s more concerning: that our elected officials lie to us, that they’re more concerned about their stock portfolio than the people they’re supposed to lead, or that they voluntarily forfeit all rights to manage their personal finances. Our representatives are either liars, idiots, or swindlers but more likely some combination of all these traits.

The irony of this entire episode was that the Congresspeople missed out on huge gains in retrospect. After the market crashed on fears of the spreading virus, it soon roared back to life, fueled by tech stocks, interest rate cuts, and government stimulus spending. The S&P 500 reached new all-time highs by mid-2020 and continued past all-time highs through 2022. By being privy to insider information, Congresspeople missed out on huge profits and one of the largest rallies in the history of the American stock market.

A lot of information in the world of investing and finance is like this. It appears incredibly useful at first glance, like something that will give you an edge over the rest of the market. But understanding that piece of information and turning that information into a profitable trade are often two very different things that are hard to successively do.

If you went back in time and told someone in the early 2000s that search engines would soon dominate the world of advertising, becoming enormous machines of profit, you’d think that information would assist the recipient in making a profitable trade. But while that information was true, how to turn that information into profit was not so obvious. 

Our confidant in this scenario may have staked all their chips on Yahoo!, a reasonable bet at the time given the company’s position as the dominant internet company of the day. They could have bet on Webcrawler, AltaVista, Ask.com, or MSN too. And while the search engine thesis would have unfolded just as the confidant was told, they would have missed out on all of the gains of this trend unless they bet on Google, a pick that was not entirely obvious at the time.

Weed stocks are the perfect example of this concept playing out in real-time. It’s common knowledge that the weed industry will grow in the coming decades as it becomes legalized in more states and goes mainstream. But everyone has a friend who takes this well-known, true trend and goes broke thinking they can parlay it into massive wealth by betting on an obscure weed stock in Oregon. While the thesis will play out, the horse they choose to bet on likely won’t be the one that crosses the finish line.

In Michael Lewis’s recent book, Going Infinite, he details Sam Bankman-Fried’s stint at the ultra-secretive quant hedge fund, Jane Street. While an analyst at the fund, SBF and his fellow traders discussed the upcoming election between Hilary Clinton and Donald Trump. The traders marveled at the lack of speed with which the market “priced in” the results of the election. 

State election officials were often slow to report results, and American market participants didn’t know who the triumphant candidate was until it was announced by a television broadcaster after receiving that information likely minutes before airing it (eons in quant time).

Given the inefficiency with which the election information was relayed, the traders were confident that they could learn the election results before they were announced on TV. Then by placing trades before the market was aware of this information, the Jane Street brigade could make a fortune betting on market moves they were certain would soon occur. SBF said of the scheme “Markets were moving at the speed of CNN, not the speed of data. We were confident we had better info than the market.” And they did!

The most striking piece of information obtained by the quants was that Trump had won Florida over Clinton, flipping the odds of Trump winning from 5% to 60% according to the Jane Street model. With such a powerful insight, SBF and Company placed massive bets against the S&P 500 as Trump campaigned hard on deglobalization and anti-free trade with neighboring countries (issues the traders thought were sure to be detrimental to the American economy). By the time all of the bets were placed, hundreds of millions of dollars were on the line.

After the money was staked, alarming results played out on the screens of the Jane Street quants. The S&P 500 surged once news of Trump’s Florida victory was announced on CNN. The Jane Street bet against the market realized a $300M loss for the firm, the single largest loss in Jane Street history.

The traders had the correct information before everyone else. The trade seemed so easy. But it blew up in their face.

Warren Buffett said “By periodically investing in an index fund the ‘know nothing’ investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”

Buffett is so spot on with this point but I would even take it a step further. The ‘know nothing’ investor and the ‘know all’ investor are often equally impeded by the information at their disposal. The data bears this out. According to hedge fund research firm PivotalPath, hedge funds averaged 5.7% returns through November of 2023 while the S&P 500 boasted a 24% gain on the year.

The moral of all these stories is this: the market is an ultra-complex system comprised of billions of people with complicated psyches, anxieties, drives, motivations, and dreams. Even if you know some bit of information everyone else doesn’t, anticipating how the masses will react to this information is another challenge entirely.

To pretend you can predict with any accuracy the cumulative behavior of these market participants is absurd. So admit your inability and just buy VOO. You’ll be better off for it.