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> "The fact that public information acquisition relates to performance is surprising. SEC filings are the very definition of 'public' information, and therefore

> "The fact that public information acquisition relates to performance is surprising. SEC filings are the very definition of 'public' information, and therefore, usage of such information should not be profitable," Honest question: isn't that a contradiction in terms? Public information stands for "stuff that everyone is presumed to know", right? Like, economists using an assumption of "perfect knowledge of the market regarding public information" (or something like that, I'm obviously not an economist) as an approximation in their knowledge. But the fact that some managers do look this up, and some don't, means that this approximation does not hold. The premise of what is implied with "public knowledge" is undermined by the very thing being measured. Assuming I understand this correctly, it looks to me like they essentially correct for the error caused by this assumption of perfect knowledge, which is the opposite of unexpected (but still a very neat finding!)

Retric 9y ago
The assumption is less that every individual has perfect information, rather that the market as a whole has that information. For example arbitration is assumed to 'work' however it's also assumed the returns will be driven down over time.
dsacco 9y ago
It's not a contradiction. A better, more formal definition of "public" would be, "information which is sufficiently accessible that its price impact has diffused through the market." In the context of capital markets, "public" doesn't mean that everyone knows it, it means that it's essentially accessible to anyone (in a reasonably similar slice of time). As a corollary, it also means that public data has more or less exhausted its (individual) impact on the market. Most "public" information is actually woefully underutilized. The only real requirement for data to be public is that everyone could know it, not that everyone does know it.
- vanderZwan 9y ago
  > "information which is sufficiently accessible that its price impact has diffused through the market." Thank you (and Retric) for explaining, but this phrasing does not quite convince me: it does not explain how this diffusion is supposed to take place, and I for one cannot imagine a way of this knowledge to be distributed among the market as a whole without individuals knowing this information and freely sharing it together. Which again seems to be fundamentally undermined by what was measured. I mean, yes, there are situations in which you can distribute knowledge among people where no individual can see the whole picture, but together they manage (for example, the knowledge required to turn crude oil into plastic requires knowledge among every step of production, diffused among individuals - nobody truly "knows" how to turn crude oil into plastic if you define that as knowing everything involved in the process). I do not see that kind of context apply here though.
  - dsacco 9y ago
    The price of a security is, formally speaking, a (weighted) sum of many disparate data points related to the security. The more data is available about the security, the more efficiently it's priced. Individuals do not need to explicitly share information about any given security to each other for it to spread through the market, because there exists a feedback cycle between any security and the publicly available data related to it. The price is literally a function of that information. In other words, every time a security is traded, its price is updated with a very small amount of new information. It's not important that any single individual has all the information, it's important that the market has all the information. That is the essential function of the market - price discovery. No single investor (or even a team) could hope to accurately encapsulate everything there is to know about a given security. The market "prices" new information into a security, which is precisely what it means for data to be diffused. Stated another way, novel information about a security represents a potential price inefficiency. But that price inefficiency is essentially lost once the data has become public.
    - vanderZwan 9y ago
      > it's important that the market has all the information. I'll be honest with you: when I read this my first response was "what does this even mean? What is "the market" and how does it "have information"?" I guess the sentences preceding it are supposed to explain the structure that the market has built up to automagically capture this information, but I don't quite follow. I'm not criticising your comments, I'm very grateful that you are trying to explain how this works and the logic behind it, but so far it's black-box abstractions all the way down.
      - Retric 9y ago
        Suppose you have: A current price aka price at last trade of 10$ and nobody willing to sell for less than 10$ and nobody willing to buy for more than 9.99$. A new seller shows up, if they are willing to wait they might get more than 9.99$ or they can accept 9.99$. Or a new buyer shows up they can buy for 10$ or wait for a lower price. Now, without effort people can just look at the history of trades and see the price rise or fall. This is independent of whatever reason that causes more people to suddenly want to buy or sell, just the fact that people are buying or selling in it's self moves the price.

Retric 9y ago

The assumption is less that every individual has perfect information, rather that the market as a whole has that information. For example arbitration is assumed to 'work' however it's also assumed the returns will be driven down over time.

dsacco 9y ago

It's not a contradiction. A better, more formal definition of "public" would be, "information which is sufficiently accessible that its price impact has diffused through the market." In the context of capital markets, "public" doesn't mean that everyone knows it, it means that it's essentially accessible to anyone (in a reasonably similar slice of time). As a corollary, it also means that public data has more or less exhausted its (individual) impact on the market. Most "public" information is actually woefully underutilized. The only real requirement for data to be public is that everyone could know it, not that everyone does know it.

vanderZwan 9y ago
> "information which is sufficiently accessible that its price impact has diffused through the market." Thank you (and Retric) for explaining, but this phrasing does not quite convince me: it does not explain how this diffusion is supposed to take place, and I for one cannot imagine a way of this knowledge to be distributed among the market as a whole without individuals knowing this information and freely sharing it together. Which again seems to be fundamentally undermined by what was measured. I mean, yes, there are situations in which you can distribute knowledge among people where no individual can see the whole picture, but together they manage (for example, the knowledge required to turn crude oil into plastic requires knowledge among every step of production, diffused among individuals - nobody truly "knows" how to turn crude oil into plastic if you define that as knowing everything involved in the process). I do not see that kind of context apply here though.
- dsacco 9y ago
  The price of a security is, formally speaking, a (weighted) sum of many disparate data points related to the security. The more data is available about the security, the more efficiently it's priced. Individuals do not need to explicitly share information about any given security to each other for it to spread through the market, because there exists a feedback cycle between any security and the publicly available data related to it. The price is literally a function of that information. In other words, every time a security is traded, its price is updated with a very small amount of new information. It's not important that any single individual has all the information, it's important that the market has all the information. That is the essential function of the market - price discovery. No single investor (or even a team) could hope to accurately encapsulate everything there is to know about a given security. The market "prices" new information into a security, which is precisely what it means for data to be diffused. Stated another way, novel information about a security represents a potential price inefficiency. But that price inefficiency is essentially lost once the data has become public.
  - vanderZwan 9y ago
    > it's important that the market has all the information. I'll be honest with you: when I read this my first response was "what does this even mean? What is "the market" and how does it "have information"?" I guess the sentences preceding it are supposed to explain the structure that the market has built up to automagically capture this information, but I don't quite follow. I'm not criticising your comments, I'm very grateful that you are trying to explain how this works and the logic behind it, but so far it's black-box abstractions all the way down.
    - Retric 9y ago
      Suppose you have: A current price aka price at last trade of 10$ and nobody willing to sell for less than 10$ and nobody willing to buy for more than 9.99$. A new seller shows up, if they are willing to wait they might get more than 9.99$ or they can accept 9.99$. Or a new buyer shows up they can buy for 10$ or wait for a lower price. Now, without effort people can just look at the history of trades and see the price rise or fall. This is independent of whatever reason that causes more people to suddenly want to buy or sell, just the fact that people are buying or selling in it's self moves the price.