April 15th each year not only marks the deadline for income tax returns but also the anniversary of the sinking of the Titanic and the tragic loss of the lives of over 1,500 passengers and crew (sinking at 2:20am on the 15th, after striking an iceberg less than twenty minutes before midnight on the night of the 14th).It is worth reflecting on the events of that fateful night, and the catastrophe which continues to hold a powerful place in the popular consciousness. Such reflecting should not slip into the tendency to pass judgment on those caught up in the disaster itself, or to revise history in light of some social or political ideology, although even now nine decades later many seem compelled to do so. And yet, even so many years after the event, there is much that applies to situations individuals continue to face, and the valuable concept of situational awareness.
The various branches of the US military have used the term "situational awareness" for over a decade to describe the difficult task of obtaining a true picture of what is actually taking place in a given situation. The military employs this term because they recognize that it is quite possible to carry a picture in one's mind which is not aligned with the actual situation. Often, particularly in situations in which real danger is involved, the picture of what is going on at the time resembles the pictures produced by the old Polaroid "instant cameras," which would spit out a black square that slowly developed, revealing in greater and greater clarity the image you just photographed.
While in hindsight and with the benefit of time (and safety) the picture seems clear and the details easy to put in their proper perspective, being able to perceive the true situation and have an accurate perspective at the time is very valuable -- and the same is clearly true in the world of finance and investing as well.
In the Titanic disaster, the ship had received six messages on April 14th via Marconi wireless (a relatively new technology, yet related to many of the technological advances at the leading edge of today's wireless developments), but only two of these actually made it to the bridge, for a variety of reasons. Because of this, although the captain had an inkling of the danger posed by the ice in the area and had in fact altered his course southward in response, he did not have an accurate picture of the true situation or the fact that the ship was steaming directly into an ice field detailed in a message that was still sitting under a paperweight in the wireless room that night.
We have written already about the under-appreciation of risk that took place over the past five years with investment banks involved in mortgage-related and CDO securitization. That chapter has now been clearly revealed to be a case of having a more optimistic picture than the situation justified. But it is also entirely possible to erroneously have a worse picture of the situation in one's mind than actually exists -- and to take a wrong turn because of it. In fact, as we argued in that previous post, the over-allocation of capital to real estate and related securities was in part a reaction to fallout from the dot.com collapse and the erroneous perception that the technological advances that drove it in the first place were just a big trap and that telecom and technology were suffering from overcapacity and were all but dead.
Similarly, today there is a widespread perception that the worldwide economy is on the brink of a cliff, that the shocks the system has encountered are just the beginning, and that it is time for investors to "batten down the hatches" if they haven't done so already.
In fact, however, it is our assessment of the situation today that there are important growth drivers in the economy (beyond the carnage in the financial sector) which will continue to develop in 2008 and over the next several years. Among these are the situational awareness-enhancing technologies that have begun to enable data, maps, video and the connecting power of the internet to become more mobile. The power of these developments to help not just consumers but also businesses of all sorts to navigate through dangerous waters with greater awareness of both obstacles and opportunities should not be underestimated, although in the aftermath of the financial sector's recent shocks few investors are looking to the future right now.
The concept of situational awareness is one that deserves important consideration. On this noteworthy anniversary, it is worth pausing to consider the events of April 14th and 15th, 1912.
For later posts dealing with this same topic, see also:
"It's a panic, not a Great Depression" 01/21/2009.
The challenge of gaining situational awareness is no less now than it ever was. However, its nature is substantially different. Previously, military commanders labored to make the best decision possible under uncertainty--the Polaroid was slowly developing, but circumstances indicated that a decision must be made immediately. This, in spite of a paucity of details.
ReplyDeleteIt was much the same in financial markets. Investors did not have rapid access to sales or manufacturing data. Those who did often used the information to their own benefit (insider trading). That is, they had better situational awareness and were able to profit from it (albeit illegally).
The major challenge now facing investors often presents itself not in information poverty, but in information overload. No matter how thirsty you may be, it is extraordinarily difficult to drink from a fire hose.
That is the challenge for today's investor. Information flows in torrents from companies, analysts, financial advisors, bloggers, etc., yet is enormously difficult to determine the veracity and utility of the information and advice. Often times, it is difficult to even determine what information is relevant for a given situation. This is an important concept because information which is crucial in one situation (falling interest rates, rising unemployment, etc.) may not be useful in others (rising interest rates, increasing job rolls, etc.).
Situational awareness is, as always, critical. However, the struggle continues to make sense of a tsunami of data.