Yesterday, the Dow Jones Industrial Average plunged 143 points in seconds following an erroneous report that there had been “explosions at the White House and that the President had been hurt”. The Associated Press quickly corrected the story and confirmed that their Twitter account had been hacked. Shortly after the story was corrected the market regained all of its losses and eventually closed at the highs of the day. There is an important investment lesson in this episode.
The lesson is about market efficiency and the ability to move quickly enough to take advantage of security mispricing. Today, more than at any time in history, information travels at light speed between market participants. This creates a situation in which it is very difficult to act upon a particular piece of information profitably in the short-term because it is already known by millions of other investors and is therefore already reflected in stock prices.
The practical result of this instant information transfer is that investors are better served by establishing a long-term, low-cost portfolio whose success does not depend on outmaneuvering other market participants. The good news is that this strategy has always offered the best chance for long-term success and that the case for taking this approach is only strengthened as technology makes it easier to share information around the world.