The Stock Market Is An Information Processing Machine

Published on

Sometimes you have to go back and reexamine the most fundamental questions. What is the stock market? We put our retirement money in it. We comment on its gyrations frequently, sort of in the way we do the weather or the baseball standings. “That market has been acting crazy lately, hasn’t it? “Boy, I wonder what that market has been up to, I never thought that I would see it do that.” We turn to others for affirmation of our speculations. “How have you been doing in the market – Do you think it’s safe for the time being?

The Market Is An Information Processing Machine

The simple definition is that the market is the collection of the stocks of the various companies. The price of the market reflects the fluctuating values of those companies. The price goes up and down but thankfully more up than down over time (because the companies gain the ability to generate more wealth). If you own a share of that market thing, you get to participate in the enjoyment of the wealth creation. Not a bad deal at all.

Fine. All that is so. But the market is a thing of its own. It’s not just the collection of all the companies. When you mash them all together in a market, something new is created. What is this new thing, the market itself?

It’s an information processing machine.

The market takes in information, determines whether it is good news or bad news for the companies and translates the information into a change in stock prices. You know how Rumpelstiltskin would sit at that spinning wheel and transform straw into gold? The market is like that in a way. It transforms information – which is just words, really – into dollar bills for all of us. It’s a magic trick. One that helps our economy to spin around nicely.

That’s a catch.

What if the information is in error.? Bad information is a thing, is it not? Given that the market has this magic ability to spin information into gold, what’s to stop it from misinterpreting information bits into gold when they don’t merit the gold treatment?

We all want more gold in our vault. What if on days when there isn’t any real gold to be found, we just talked ourselves into believing that there was some information floating around that looked sorta kinda like gold? Could the market transform that stuff into dollar bills reflected nicely on our portfolio statement?

That’s Shiller. That’s the last 42 years of peer-reviewed research in this field.

When the market transforms real information bits into gold, that’s super. We should celebrate that. When the market turns phony, emotion-based information bits into pretend gold, that gold doesn’t last, the shininess eventually flakes off and we are left with millions of failed retirements and all the rest, you know the story.

Beware false gold! That’s the moral of Shiller’s research.

Distinguish emotional information bits from real economic-based information bits. That’s the intended takeaway.

I’m a journalist. I gather information and then share it with lots of others. That’s my work. That’s my life. That’s the thing that I do with my time. So I tend to look at everything that I come across from an information-gathering perspective.

Stock investing is an important subject. It affects millions. Shiller’s research is of great importance. It wouldn’t have caused him to be awarded a Nobel prize if the reality were otherwise. But not one site on this internet thing, where all sorts of insignificant subjects are explored in great depth on a daily basis, is devoted to the exploration of the how-to implications of Shiller’s research.

It cannot be. But it most definitely be.

This puzzles me.

So strange.

Shiller’s research provides powerful information bits! We should be talking about it everywhere. All the time.

I am banned at lots of places on the internet. It’s not that people dislike me as a person. It’s because I talk about that darn Shiller research, knowledge of which positively must be suppressed. And I won’t stop, you know? Something in me makes me want to gather the Shiller information bits and pass them on.

I want to transform your wealth into nothingness!

That’s true, isn’t it? It’s not the entire story but it is indeed an important part of it. It explains the part where nasty people say very nasty things about me and you just stand there acting as if nothing happened. I can’t help but want to see that part explained and the reverse gold transformation does it.

The stock market is an information processing machine. If we want to see runaway bull markets, Buy-and-Hold is the way to go. If we want to see honest, real reports of the value of our stock holdings on the pages of our portfolio statements, we are going to have to permit information about Shiller’s Nobel-prize-winning research to be more widely disseminated.

Information is power., And right now, the information advanced by the last 42 years of peer-reviewed research has been drastically disempowered. Thus, the CAPE value of 31 that applies on the day I write these words.

Rob’s bio is here.

Signup to ValueWalk!

Get the latest posts on what's happening in the hedge fund and investing world sent straight to your inbox! 
This is information you won't get anywhere else!