Saturday, February 28, 2015

Has the advent of the internet moved the cheese of value investors?

Several of my blog readers have asked me whether the advent of the internet and digital age made markets a lot more efficient. It is true that it is much easier to get access to information today than it was before the digital age. For example till a couple of decades ago you had to order annual reports in physical form but today you can go to a website and get the information. Several value investing blogs, forums and social media have information about publicly listed businesses. The exchanges on Dalal Street and elsewhere provide tons of information on actions, financials, key dates, conference calls and more. The key management personnel are on facebook, twitter, LinkedIn and various other social and professional networks. You might even have them as 2nd or 3rd degree connections in the worst case. This could enable to get their bio-data and contact your friends to get impressions.

The truth is that there is an information overload and the amount of available information on a business CANNOT be processed by the portfolio manager. The key is not the quantity of information or even the quality of information but the ability of the value investor to discern the important parts and most importantly follow the rules and psychology of value investing.

The institutional performance derby continues as it did in the past. In fact some would say that the manic depressive moods of Mr. Market have been exacerbated to an extent because of the information overload. A general feeling of doomsday is coming or everything is rosy is far more likely to spread in an internet world because of the speed of information travel.

Trading volumes are an indication of the manic depressive moods of Mr. Market.

Data from World bank

As you can see the global volume numbers are well over 100% which means that the entire market changes hands at least once a year. If you change 100% of your portfolio once a year you are bound to be fickle. No wonder many a value investor has said that one of the biggest advantages you can have is a long term mindset.

Delivery percentage of total shares traded is another great indicator. This means how many shares after changing hands actually ended up from the hands of a seller in the hands of a buyer. They may have changed hands many times during the day. So a delivery % of 50% indicates that the shares on an average changed hands 2 times during the day. A delivery percentage of 30% indicates 3 times and of 20% indicates 5 times per day!
Delivery % of NSE stocks

If shares change hands 2 to 5 times during a day I am sure you understand why I (and many value investors) believe that the market is not efficient. There is no way that the value of a company changes enough for the average participant to change his mind 3 times a day. I accept that some of this may be due to statistical arbitrage funds buying on exchange and selling on the other but both exchanges have a very low delivery percentage.

Needless to say that the internet age has made trading easier that it used to be in the pre internet days. The transaction costs are lower than ever. This reduces friction and the efficient market theorists say make markets more efficient. But this also gives rise to emotions of investors being expressed rapidly in the markets. People can trade on the move on mobile apps – so some are even trading while driving home. Bad behaviour of fellow commuters might even drive some trading!

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