Some of you may remember from the earliest days our quest for investment innovation and new technology, not to mention references to our preferred workplace. That hasn’t changed. I am delighted you’re here now to share with me this new, very public, very global “sandbox.” Someone will soon use this tool to offer Virtual Investment Management that will combine and use generally available tools on the frontier of each technology to provide the most advanced, readily available, global, highest quality and efficient service in the industry.
When investment analysis began to be highly quantitative 20 to 30 years ago, problems of modeling had to be broken into small, manageable pieces to be studied and then reconstructed into a whole to run. In the investment world we have demanded so much precision in our data, so-called clean data, that all benefit of a favorable surprise is gone. Just think of charts and how often we see equal units of time on the horizontal axis. But is all time equal? Not in the physical world … some time is more important than others when things are happening.
Perhaps analytical synthesis lost the important interconnections and complexity which are inherent in an organic market world. Just breaking out of our concept of time may release our minds and models from the bonds of false assumptions about how the investment world operates.
There is a way to deal with the world as it is. Several centers of study are attempting to move the new mathematics of complex, dynamic systems into application to analyze data, verify its validity instantly, correlate its relation to other data, and provide a risk assessment.
Market simulations can be forward-looking rather than backward. Just as we have flight simulators to train flight crews, comparable tools are becoming available for investment practitioners today. Trading models using “high frequency” data. Neural networks and genetic algorithms. New techniques of visualization like virtual reality and multimedia data displays, providing insights into data equivalent to what the electronic microscope did for images that could only be seen by optics. You can “sense” data in addition to analyzing it… and in real time.
Market forces that can only be imagined can be tried on traders before they happen in reality. Emerging markets or any markets that have idiosyncratic features can be modeled, studied and mastered before expensive lessons are learned with real money. The simulations can be used as default decision makers. In a world which demands new risk control tools, they are at hand in the market models which move instantly along complex lines taking into account rapid external forces.
This world is inherently complex, organic, adaptive, nonlinear. It follows no rigid patterns, but it does have a pattern… just different than we have been taught to expect. In physics, around the turn of the century, experimental data from new laboratory machines challenged and eventually overturned Newtonian principles. We may stand at the same place in investment thinking almost a century later.
In today’s high-speed financial world of derivatives, foreign currency and newly-invented instruments, a workable traffic monitor may be of more value to the financial system than any other feature.
The Internet is with us; there is no mistake. Signs have Internet addresses, global business and content is freely available, and young children are tutoring their parents. The developing world knows it is their pass to better information, fast and free. Originally invented at CERN in Switzerland, it is evidence of a complex adaptive system sweeping the world… because it works.
Internet R&D is booming. The web is largely an academic creation. Netscape was done by a couple of Stanford graduate students; CRAYON by two sophomores from Bucknell; Yahoo also by Stanford students. One of the best investment sites comes from MIT. Harvard Business School is teaching a case study with students discussing work on the web. Yet, curiously, there seems to be little immediate commercial motivation.
What can you do almost instantaneously with the web tools? Could you decide what to buy and sell? Yes. Would you have an understanding of the culture and issues of developing markets? Yes—and maybe better, because on an investment research visit, you only get to the people who are willing to reach you. There are ways to use the technology to have continuous offerings, shareholder bulletin boards, even meetings of boards of directors by PictureTel, from anywhere. Your personal capacity becomes nearly limitless.
The Internet is global… any point on the globe is as accessible as next door. It is cheap and often free. It shifts control of time, depth of information and source to empower the user. And it is open. Anyone can come in taking its knowledge and offering skills. Financial centers are described on a satellite connection, not geographic coordinates or proximity to other financial talent centers. Work takes a different form in time and space with e-mail, video conferencing and the Internet, all of which is available at a price for the single user at his own site. Location becomes irrelevant.
Virtual Investment Management
It is impossible today to gauge what it will ultimately do for investment practice, but a few hours spent browsing worldwide web sites for financial information is all that is required to become convinced that we are not going back to our old ways. For a developing country, wow! For a developing investment practice, double WOW!
A long time ago, I stated that the investment practice of the future would be a small group of people and one big machine. But I was wrong. With today’s tools and insights, the notion of one global person with access to many machines is achievable.
– Dean LeBaron