The Age of Information.
The internet has brought tons of free information into our lives instantly. With all this valuable information, why are the world’s financial markets still wrought with news-inspired panic selling? Why doesn’t “the smart money” quietly sell their risky investments before the panic hits?
Case in point: Canada’s giant pension plans lost billions because they held too many financial stocks when the US sub prime mortgage story hit the headlines in late 2007 and 2008? But, these dangerous US mortgage statistics were readily available in 2006. Several analysts had warned of the problem six months before the stock market started to react. Why didn’t pension funds quietly reduce their exposure to financial stocks in the light of this readily available information?
Big pools of money have a problem that small investors do not have: illiquidity. In order to sell their really big investment positions, they need time. If they were concerned about those dangerous US mortgages, they would have to start their stealth-selling program early, quietly off loading their giant positions with little or no fan fare. The information on US sub prime mortgages was available in of 2007. The big pension managers had plenty of time to act. Why didn’t they sell?
The answer is tangled in our human nature: human nature as it applies to big investment managers and to those who report financial news.