Sometimes the market is best viewed from afar


That investment style of being in touch with the market but distant from it has impressive antecedents and performance.

In an August financial crisis, Masters of the Universe must use their BlackBerries from the beach. They are constantly in touch with the data, but out of physical contact with their colleagues. The contrast with 1929 is complete. Then, investors were in contact with each other, but not the data. They crowded around in panic, commiserating with each other, as the ticker tape lagged behind the market.

The death of distance through globalisation, and the ubiquity of data, have been dominant themes of business writers for two decades. Yet Wall Street and the City of London are still literal as well as metaphorical centres of world financial markets. New buildings are rising there on real estate more valuable than ever. While trading is on screens rather than in physical markets, the screens are grouped together in trading rooms. When hedge funds move out of Manhattan and the City, they move en masse, like lemmings, to Connecticut and Mayfair.

There are practical advantages of congregating together. Clustering proved to be as characteristic of the high-technology industries of the 1990s as it was for the manufacturing businesses of potteries and textiles.

Scale economies are found in provision of common support facilities. These can be of direct business relevance – the back office requirements of proprietary traders; or appurtenances of the business – lap dancing clubs on the edge of the City for traders and the elegant restaurants of St James’s for hedge fund managers.

The most striking feature of electronic communication is not how much dispersion of activity it has produced, but how little. Teleworking and videoconferencing remain more talked about than done. YouTubeand MySpace are for teens and college students, not grown-ups. E-mail is an impoverished form of communication, as Martin Lukes reminds us every week. And if you need a Second Life, it is probably because there is something missing from your first.

These lessons are lost on the most determined quants. But the failures of quantitative models in the past few weeks have emphasised that the degree to which the world of business and finance can be adequately described by any model is limited. Qualitative data matter as well as quantitative; knowledge is intrinsically imperfect. The information that can be handled by information technology is only a fraction, and sometimes the less important fraction, of the information that matters.

So colleagues exchange knowledge without any prior intention to do so, in water-cooler moments. Body language can be transmitted electronically only by systems with very high resolution and very high speed. The fraction of a second needed for a signal to reach a satellite and bounce back can change the meaning of a message. People continue to need direct face-to-face contact with competitors and associates.

There seem to be advantages to the individual in being close to the action, but also a large downside. Physical proximity helps create a conventional wisdom. Even among Oxford philosophers, perhaps the most argumentative people the world has ever known, day-to-day contact tends to create a common view, even a school of philosophy. Discussion may genuinely resolve differences, or else the repetition of disagreements just becomes too wearing. But the abstruseness of linguistic philosophy that resulted illustrates the problem. The self-referential world of people whose communication is mostly with each other can, and frequently does, become divorced from external reality.

So Warren Buffett, the most successful investor in history, trades from Omaha and advocates an investment style characterised as “lethargy bordering on sloth”. That approach was favoured by John Maynard Keynes, who operated from Bloomsbury and Cambridge and normally traded by telephone from his bed.

That investment style of being in touch with the market but distant from it has impressive antecedents and performance. Perhaps the traders with their BlackBerries on the beach are in the best place to take a rational view of market developments.

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