5 December 2016

It's all about the microwaves

Let’s start with a simple question

Let’s start with a simple question. Why is the night sky dark? A question that I had never contemplated until it was put to me in a physics lesson. The  first answer that pops to mind for most is; because the Sun is around the other side of the Earth. Whilst this does explain the lack of sunlight from our favourite heat source, it is not the whole picture.

In order to explain this fully, you will have to allow me one assumption; the Big Bang (in its original sense), or something principally the same, occurred. This is essential for two reasons; the first is that all matter in our universe originated from a single point. The second is that the universe has been expanding ever since, and continues to do so.

These are widely accepted hypotheses, but the second in particular is hard to get your head around. I hope by the end of this (long, drawn out) explanation I will have convinced you of its veracity.

Armed with our assumption consider you are standing on any part of the Earth’s surface you choose and point in a particular direction. Would you agree that if you were to travel in that direction for long enough into outer space that at some point you will hit a star? Yes, I hear you answer. Good.

This is where the first corollary of the Big Bang comes in. Given all matter began at one point, then all light originating from each and every star has begun to reach every other; crucially including Earth. Therefore, the light from all these stars in every direction from the Earth’s surface has begun and continues to reach us. This says the night sky should be completely light. This is clearly not the case.

Now for the second corollary. Each light wave has a given wavelength and changes in this wavelength are what differentiate red from blue. If a light ray leaves a star millions of light years away, then by definition it takes millions of years to reach us. In this interval between the ray leaving and arriving, thanks to the infinite expansion of the universe, space and time has expanded to such an extent that the wavelength of the light has been altered. In fact it has lengthened so much that is has gone through visible light, often through infra-red, and into microwaves.

The reason we see light only from the Sun is because it is physically close enough that this phenomenon, known as Red Shift, does not take place to the extent that the rays move through the visible spectrum. If you do not believe me, and I wouldn’t blame you, then grab a microwave detector tonight, point it at the sky and it will light up like a Christmas tree.

So how is this even vaguely related to financial markets? When I first started working as an analyst, it became clear that knowing what the market knows doesn’t get you very far if your goal is to beat it. It seems you have to look several steps removed from what would be considered the norm in order to spot a trend before it appears. In theory, a simple concept but in practise there are a select few that have the ability to do this.

I had the pleasure of working with one of these chosen few for my first 15 months at JM Finn and he taught me the value of looking several steps beyond. In my second week I was handed a hefty report he had written in 2009 the conclusion of which was to start buying the market again. Most definitely not a consensus view at the time but one that proved highly fruitful. His reasoning was predicated on a number of rice field workers in Japan... Clearly!

You have to look several steps removed from the norm to spot a trend before it appears

During the financial crisis a company in Japan that made semi-conductors for electronics sent their now- thumb-twiddling workers out into the rice fields, rather than lay them off entirely. This was unconventional but went largely unnoticed. He had come across the moment these workers were recalled from the fields hidden amongst the inordinate number of articles he read on a daily basis. To him the rest of the steps were obvious; things had turned and now was the chance to reinvest.

He wasn’t waiting for employment figures, or a strong earnings season, or a signal from central banks. He wasn’t looking for sunlight. He was looking for microwaves.

This was an extreme example of the success that can come with paying attention to that which others overlook, and not one I expect ever to emulate to the same degree. But the lesson can be applied to many aspects of life, particularly in investment analysis.

To question everything, and never take anything at face value won’t make you many friends in a social environment but should stand you in good stead in this industry. It’s all about the microwaves.

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