Market Commentary for the week of July 18, 2011

The long road.

Technology has indelibly changed our lives, and the pulses within, from longer-term to short term solution-making.  One sees this evolution, particularly in hindsight, in the way we process information and the multitude and complexity of decisions we are called upon to make.  The younger-set calls this “multi-tasking,” while others of us refer to it as brain “overload.”

But the overriding issue to me is not whether we have the technology, sophistication and panache to execute complex decisions, but whether or not there is an imperative to do so.  In other words, simply because we have it does not necessarily (definitionally) mean we have to use it.

This is particularly relevant to the financial industry because the complexity of market derivates, multiplied by infinite factors, has created a system that cannot support its own weight.  Just because we can, does not mean we have to.

Witness the convergence of market algorithms and trading systems, many of which you can buy at a discount brokerage house.  In the wrong hands… heck, in the right hands… these systems can be bastardized into producing high speed trading models designed to make the user more facile at trading market inefficiencies.  They also confuse trading with investing, dissecting the orderly flow of capital into staccato eighth-notes of turbulence.

Finish line.

Assume for the moment that you and I start out with the same objectives, to make money, but your engine is revving at 120 miles per hour (along with your pulse) while mine putters along much more slowly.  Without making any judgment calls about which disciplines are “better” (they’re all good), the efficiency you create is offset by a narrower margin for error and a shorter time line.  Further, assuming we arrive at the finish line together think of all the unnecessary layering and machinations you have imposed upon your system.

Think, too, of the recent mortgage debacle and all the vice-presidents it took to composite a derivative CMO or some other such product simply to layer up, and add fees to, a simple transaction at its core.

Somewhere in-between.

The key input to profit-making is energy and expense.  To make serious headway, I believe we need to simplify market techniques rather than to complicate them.

To do this we must first elongate the time line of discovery and execution, as well as the evaluation of what makes a successful investment.  It seems simple to say, but the fact that we have technology and multi-tasking at our disposal has not yet proven, in the last decade at least, that it has made the end result any more proficient or successful at generating alpha than not to have had them.

What millions of high-tech, turned-on, investors haven’t come to realize, yet, is that their personal receptivity to things “old fashioned” isn’t as advanced as their gizmos and gadgets.