MISALLOCATION OF CAPITAL AND ATTENTION

As investors we all value market volatility. It is the rocky ride of markets that create opportunities for profit. It also causes investors to direct their attention to many aspects of their investments and the environments around them. No matter whither the indices investors have to stay invested. It is by weathering out market storms that target valuations are made and exits negotiated. Popular portfolio theory attributes information as the lifeblood driving valuations. The value of the underlying assets is driven by the market sentiment — which is in turn made of perspectives driven by scores of analysts. In fact an analysis of analyst reports keywords are used to determine posture towards specific stocks.

The analyst reports are in turn driven by the “attention” that they have paid to identified indicators. In almost all cases the aggregated portfolio view of this “market attention” causes the decisions they make towards the investments.

In all cases these reports are a combination of personal meetings and bits of information from multiple sources. These contribute to the large volume of streaming information. For someone who is looking at the investment from the outside there is no deficit of items that can distract focus. In many cases these trusted aids are intended to enable “investors” be aware of key goings on in the investment environment. While transparency is of paramount importance information overload causes misallocation of attention. As someone said there is nothing called information overdose — its only a problem of poor filters.

But how do you identify the filters ? It comes from trust. If it were possible to determine that sources of information are formally identified as being credible — and they are indeed incentivised to provide the right information — then they become the sources of truth.

However in an open market there is no incentive for the parties that know to share information. Information is used to leverage market positions — and if illegally obtained it is tantamount to insider trading. However if the incentives are right market valuations of stocks reflected on key indices will truly be accurate — and a win win for all.

Here is an example. For an ETF that is focussed on emerging markets it drives its portfolio on a number of quant based strategies and also qualitative information from key sources. In using the information from these sources its attention is focussed only on those items that drive their own investment scorecard. However for the same targets in the EM stocks/businesses there exists a body of knowledge that lies with the business chain that these companies work with. E.g logistics companies, staffing contractors, raw material suppliers et al. All these players are in close contact with these companies on a daily basis. Their view of the business is substantially different from the analysts who are looking at leading and lagged financial indicators as markers for milestone calls. An order for raw material which is even 20% higher than the last order is an indication of the business is trending. Payments and receivables — depending on who is receiving or paying — and its timeliness will show how things are trending. Purchasing Manager Index is just that — an index. Not an incentivised business view that enables a decision on where the business is headed.

For portfolio balancing and rebalancing in favour of either returns or risk involves allocation of attention towards identified opportunities and drivers. By staying on course to watch market indicators from truly incentivised sources investors and lenders can make crucial decisions on their “investments”. For example a key supplier could influence a lending decision to the company by way of his unbiased opinion about a client business and associated metrics. An information eco system that is incentivised to share unbiased information about its business environment and its players will improve attention allocation and drive an easier access to capital for those who need it. Just like risk finds its own level resources will be able to flow to those places where they are targeted by investors.

There is now an option to obtained trusted information from sources close to the investment target organisation.

Dropdeck.io now enables organisation to seek trusted investors/lenders and get their support. Investors in turn can get “accredited” sources provide credible references. Also get “interested” parties known to the borrower/investee make crucial referential decisions that can help in the moments of truth.

Key highlights of Dropdeck’s rounded offering are covered below.

Dropdeck not only incentivises stakeholders in the investment/lending supply chain but also widens the choices for the seeker. From an investor/lender POV it diversifies their portfolios and helps gauge new types of risk by bringing in cross border opportunities. Subject to legal regulations and tax regimes this can be a very useful new source for SMEs looking to seize business opportunities and also go global.