Getting good information quickly can be important in investing.
Throughout history the humble pigeon has been used as a messenger, transporting information at speeds well in excess of most alternative methods. Genghis Khan maintained communications throughout his empire using the Yam, a postal system where messengers rode between relay stations and swapped horses en route, but many important messages were sent by pigeon.
Today, rather than use pigeons, we obtain most of our information through the global telecommunications network, primarily through television, telephones, the internet and newspapers. Some investors are particularly keen when it comes to new information as they may be able to profit if they receive it before the market has managed to digest its implications.
History gives us many examples where the timely delivery of a pigeon-borne message gave its recipients a huge benefit. One of these was when the Rothschild family made a fortune in the markets thanks to receiving news from the Battle of Waterloo by carrier pigeon.
Dispatches From The Battlefield
One thing was certain; a British victory at Waterloo would cause the price of British government debt (gilts) to rise substantially whilst victory for Napoleon would cause gilt prices to crash.
The Rothschild family had been using pigeons to communicate between the various far-flung arms of their financial empire for some time, so it was no surprise that Nathan Rothschild in London received news via pigeon of Wellington's victory at Waterloo before everyone else did, even the government who only found out a day later!
This piece of information gave the Rothschilds a tremendous advantage over all other market participants; they now knew that gilts, and many other assets, were underpriced. How much money the Rothschilds' made is open to debate but one thing is certain; they profited because they had accurate information before anyone else did.
Some people might argue that this was insider trading, but the result of the battle was publicly available information known to anyone at the battlefield. In contrast insider trading involves acting upon information which is not in the public domain.
Modern Day Pigeons
The pigeons for today's investors are official stock exchange announcements, government statistics, market prices and current events, all of which are rapidly reported by numerous internet websites, wire services and radio and television stations.
Some investors focus upon this type of information, arguing that if they notice and act upon new information before most other market participants then they can make profitable trades.
Despite the protestations of the efficient market cheerleaders all too often a key piece of new information, such as an oil company's latest drilling result, enters the public domain yet the price of its shares sometimes do not move as a result largely because much of the market is still half-asleep and hasn't yet realised the importance of the news.
Faster And Better
Every investor can benefit from having better information -- the problem is that doing so can take a bit of work.
Consider a situation where you've bought shares which you thought were a bargain because, according to the newspaper, they were on a price-earnings ratio (P/E) of 6 and paid a 3% dividend. So it would be a bit of a shock to discover soon after buying that the company had recently cancelled its dividend and that the earnings which produced the P/E of 6 were vastly inflated by an asset sale, making the P/E for the remaining businesses much closer to 20.
But you could have easily discovered this information by reading the company's annual report and checking the recent official stockmarket announcements. Bear this in mind; it's always a good idea to double check the key figures.
Many investment banks and hedge funds have moved their high-frequency trading computers as close to the stock exchanges as possible in order to reduce the delay between information passing between the exchanges and their automatic trading programs. High-frequency trading has become the modern equivalent of Rothschild's pigeons where milliseconds can mean money as even small price movements contain valuable information which the computer programs act upon.
Private investors operating in the short-term simply cannot compete directly with these computers; it's arguably more effective to buy shares in firms like Goldman Sachs which use high-frequency trading!
A Pigeon Postscript
Probably the most famous pigeon is Cher Ami, who served with the 77th Infantry Division of the US Army during World War One. During the Battle of the Argonne Forest in October 1918, Major Charles Whittlesey's battalion had become isolated after advancing well beyond their flanking support. Not only were they surrounded and pinned down by the numerically superior German defenders but, thanks to some faulty co-ordinates, they were being shelled by their own artillery.
Whittlesey dispatched his unit's last remaining pigeon, Cher Ami, to headquarters with a message to stop the bombardment. As he flew away the Germans shot Cher Ami in the chest and he suffered several more injuries, including the loss of an eye, on crashing to the ground. But he picked himself up and, covered in blood, flew twenty-five miles to the divisional HQ and saved two hundred lives as a result.
Cher Ami was awarded the Croix de Guerre and his stuffed body remains on display in the Smithsonian museum.
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