A cacophony of signals

Driving home from work this week, I passed a truck that sported a confederate license plate on the front bumper and a large American flag mounted in the pickup bay. This dichotomy struck me as odd. Was this going to be a General Grant or a General Lee day? I mean, growing up we had lots of debates as kids driving around in our parents' big Chevy station wagon, but it never came to secession of one part of the vehicle from another.

In investing, you get lots of signals, and many of them oppose each other. Any given person will pay attention to certain signal, or news, but it is impossible to watch it all, never mind factor in relative importance correctly. Researchers at certain hedge funds try to build models to incorporate a wide variety of input signal, and trade on them. It requires tremendous computing horsepower.

Remember that an index fund, for a given asset class, is taking some type of weighted average of all of the signal. By its nature it incorporates the intelligence of the world's investors. Even if there is a lot of news around a topic, like a tariff, the index is instantly readjusting in price to incorporate that news. Importantly, because markets "look ahead," it also signals the present value of what investors expect the news to mean in the future.


One of the insights I've had over a couple of decades of doing: often interesting returns and investment action is where the news media isn't. A perfect example is brewing this year. From the start of the year until today, United States real estate is up over 20% year-to-date. Real estate has not dominated the headlines this year, yet it has crept steadily upward.

Keep this in mind: like any organization or committee meeting, it's not always best to attach your fortunes to the loudest member.

Dan Cunningham

p.s. One final point on real estate. It's incredible that the aggregate value of the roughly 188 largest publicly-traded real estate investment trusts (REITs) in the nation is over 20% higher today than 137 days ago. Is that really rational when you step back and think about it? On the other hand, if it's not, it's not clear which point is irrational...

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