On The Utility of Publicly Available Information

Last week, the Wall Street Journal ran a feature article concerning the private research coordination business founded and managed by Mark Gerson.

It reminded me of a one-time analyst and money manager I knew years ago who broke into the business in a similar way. Though his network of contacts among retail packaged goods salesmen, he had access to what was, at that time, essentially instantaneous field sales reports. By offering his analytical services free for a few months, he secured a prized research post at a mid-sized broker.

Gerson's business does this on a larger scale, by brokering purveyors of such private intelligence, with those who would like to have it, but don't know the right people. Among his clientele on the buying side are, apparently, legions of hedge funds, who want up to date information on grass roots sales results and field performance of various products and services.

Some way into the piece, the author quotes a private investment firm's partner as saying,

"What's in the public domain is worthless in terms of making money."

Strong words, indeed. And, as it turns out, wrong.

My own experience, using only Compustat data, is that an effectively constructed equity strategy can consistently outperform the S&P500 without using 'private' data. The equity strategy that I have built, refined and managed over many years has consistently outperformed the index, using only Compustat-sourced data. A look at some of the information on the companion website to this blog will give you some idea of what I mean.

My guess is, the investment firm partner who was quoted in the article focuses on very short time periods, and is primarily involved in trading, as opposed to investing. It never fails to amaze me that so many institutional 'investors' feel they must have 'non-public' information, in order to outperform the market.

Rarely, it seems, do investment managers consider building more potent selection processes, which incorporate understandings of the investors' behaviors, as filtered through market outcomes. Perhaps because, as author and fund manager James O'Shaughnessy points out, so few people are disciplined, the concept of consistently using an approach which is carefully developed to take investors' behaviors into account is simply unworkable. Their animal passions and emotions take over, negating whatever value there is in allowing a well-developed selection and management strategy to operate as intended.

It has continally surprised me that one can outperform a major market index simply by carefully, consistently observing and processing regularly-recurring public data. You'd think that anything so widely available would necessarily have no value, as the quote's author seems to think.

However, the reality seems to be that, with so much data about companies and markets available, knowing just 'which' data may provide key insights is less obvious than you may think. And knowing how to evaluate, or analyze it, appears to be more arcane than you might think, as well.