Throughout history, one constant has remained when answering this question, as Shaun McDade explains.
One of many apocryphal stories about the legendary financier Nathan Rothschild was that he was able to profit from Wellington’s victory at Waterloo because his couriers delivered news of the battle’s outcome quicker than anyone else’s. Such was Rothschild’s status and reputation, track record and consequent following among other investors, that his actions would frequently influence the direction of markets.
Unlike today’s financial world, where fibre optic cables deliver information across vast distances at (literally) the speed of light, gaining an information edge in 1815 was down to whether a carrier pigeon could make it from Belgium to England, how fast a boat could cross the English Channel in a westerly wind and three-foot swell, or how quickly a horse could carry its rider from Dover to London. Back then, it’s true to say that first-mover advantage counted a lot more than it does now, with technology having flattened that particular aspect of the playing field*. Irrespective of the means of delivery, however, then, as now, information is what moves markets.
Using our nineteenth-century example, the conclusive end to a long military campaign meant that the British government would no longer need to issue debt to fund the war. A reduced supply of UK sovereign bonds would mean higher prices to meet the same level of demand, which would result in lower interest rates. Lower interest rates would likely mean that banks’ margins would compress, their profits decline and their share prices could fall. As would those of armaments companies, as the volumes of cannon balls, muskets and bayonets they produced suddenly shrank.
Meanwhile, as conscripted soldiers returned from the war and went back to their old occupations, the prospect of a rise in agricultural production could be expected to reduce the price of next year’s crops. For the buyers of those crops, that would clearly be helpful: breweries, for example, could be paying less for the barley used to make their beer and the share prices of the companies that owned them would rise on the prospect of bigger future profits.
And so on and so on… One single event – many outcomes.
Two hundred years later, the financial world is very different in many ways, not least in terms of its scale. Shares in tens of thousands of companies, trillions of dollars of sovereign and corporate bonds, along with currencies and commodities can be traded on markets around the globe twenty-four hours a day. In addition to which, derivatives exchanges provide investors with instruments that allow them to profit (or not!) from falling, as well as upward, moves in asset prices without even owning them.
These are accessible through a seemingly limitless number of channels by anyone with access to the internet and are relayed to an information-hungry world by innumerable media outlets.
While many aspects may have changed, one constant remains: the driver for most movements in securities’ prices is a response to changes in the perceived future value of those securities and the triggers for those changes are specific events. These can range from events on a geopolitical/global scale, to those that are localised at a regional-, country- or provincial level or relate to an industry, a single company, or individual product.
In fact, they don’t even have to be real! Speculation, rumour, and “fake news”, some or all of which turn up on the above-mentioned media outlets, are equally capable of triggering responses that drive changes in individual securities, sectors, markets or even at a global scale as things that actually happen.
This means that, although their importance and impact should never be underestimated or ignored, an investment approach that focuses too much on individual events and markets’ short-term reactions or attempts to trade around them can be a hazardous pursuit. It is certainly not the approach we advocate. Observe and digest those events by all means, but providing they do not disrupt the established direction of travel, we prefer to ride out any short-lived volatility and stick with a long-term plan.
If you’d like to find out more about investing with Ravenscroft, or if you have any questions you’d like us to answer, please contact us.
*To a large extent, at least: Michael Lewis’s excellent book “Flash Boys” sets out the extraordinary measures taken by Wall Street investment banks to gain an edge by reducing the transmission of information by milliseconds.
