As my wife and I navigated the busy streets home from the downtown core, our trusty Waze app was front and centre, skillfully zigzagging us across the city . As the traffic slowed to a crawl, my wife told me to make a left as she was confident she could determine a better and faster route home.
At this point I had to ask myself, is my wife smarter than Waze?
For those unfamiliar, Waze is a GPS navigation software app owned by Google. It leverages the GPS on your mobile device and millions of pieces of user data to provide turn-by-turn real time navigation information and travel times for wherever you need to go. It also provides users with the ability to alert others to road hazards, traffic cameras and where police have been spotted.
If my wife could outsmart Waze, the implications were staggering. In my head I was already planning the trip to Vegas and which casinos to hit first.
The question of whether someone could beat the system is similar to an ongoing debate in investing. The stock market also absorbs copious amounts of information, with the net result being the prices we see for various financial products, such as stocks and bonds. Beating the system would be tantamount to an ongoing debate of whether active investing (i.e. picking stocks and bonds to outperform the market) is better than passive investing (i.e. simply holding the index).
So, I made the left (of course), and as I did, it occurred to me that there are a number of other similarities between investing and Waze.
Waze Investing Concept #1:
Waze route recommendations, like stock market prices, are always correct as they reflect all available information
Waze has 110 million active monthly users and works by sharing real-time information that translates into traffic conditions and road structure. Individuals can actively report on traffic, accidents, police traps, blocked roads, weather conditions and much more. Waze then uses this information to calculate average speed, learn road direction and determine optimal destination routes. The assumption is that any deviation from a recommended Waze navigated route is a lesser-informed guess.
The stock market has an equivalent assumption, named the efficient-market hypothesis (EMH). The theory being that stock prices fully reflect all available information and always trade at their fair value, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly outperform is by chance.
This is the primary belief among many passive investing advocates who believe active investing cannot beat the market consistently.
Waze Investing Concept #2:
Random hazards can dramatically impact the time it takes to reach your destination
Occasionally, Waze will notify you of a recently user-reported hazard, including accidents, and road debris. Waze will use this information to adjust the route and destination time accordingly, if necessary.
Investing works the same way. A market “hazard” such as a market downturn, or significant event that leads to market uncertainty, could dramatically impact the time it will take to reach your investment goals. Just like Waze, you may have to adjust your “route”, which could translate to reallocating your portfolio mix, to either protect your investment portfolio or increase the risk level to try and acheive higher returns.
The timing of a hazard is important. Hitting the highway just after an accident vs. happening just as you are about to exit can mean the difference between a delay of minutes vs hours. In investing, the timing of hazards also can be devastating to investor’s timelines. Hazards that hit your portfolio just before significant events, such as starting investing or retirement will more of a significant impact than others.
Waze Investing Concept #3:
Pattern recognition is important to success
Waze is constantly analyzing data to improve its algorithm. By collecting route data, it determines patterns and and calculates historical average speeds for road segments on specific times of day. The more users, the better the predictability and accuracy of the routes. It combines these historical averages with real time data to determine routes and predict travel times , which increase in relevance the more drivers are on the road.
Routes get busier on certain days of the week and times of the day. Once someone determines a better route these patterns change. It is an endless cycle.
With millions of investors transacting billions of dollars of securities, the stock market is awash in pattern analysis. The field of technical analysis analyzes multitude of charts to try to identify trading strategies to beat the market. High frequency traders use sophisticated algorithms and even build their own new roads via direct-to-exchange fiber optic lines to beat the market. While no pattern may be full-proof, recognizing a pattern as simple as knowing which asset class to buy when interest rates go up can give you an insightful advantage over overs.
One simple pattern that investors can easily follow is that history repeats itself. Market bubbles lead to crashes which lead to buying opportunities. Most market crashes have led to spectacular returns in the years following the crash. Staying the course through conviction typically beats market timing every time.
Waze Investing Concept #4:
No one knows everything
While Waze may be making the best route and time calculations based on the information it has, it even admits it doesn’t know everything (advantage, my wife) and sometimes doesn’t provide you with the best route due to map errors, network issues or lack of data on a potential route.
User reported data can even be purposely false as there are reported cases of individuals attempting to reduce road congestion in their neighbourhoods by providing fake hazard reports, or highway patrol officers who have admitted to creating incorrect reports to mislead drivers about their locations.
Contrary to efficient market theory, many believe the market in fact, is not efficient. Warren Buffett and others dispute the hypothesis and believe investor psychology and other factors create opportunities to outperform, particularly in the short term. One only has to look at the financial crisis, Enron scandal, or even Bitcoin to see that the market doesn’t always get it right.
Waze Investing Concept #5
Beware the over-reliance on technology
The route that Waze and other navigation apps produce don’t always take into account some of the more human elements of your drive, including streets that are close to schools and residential neighbourhoods. My wife and I were once stopped on the road by a parent who pleaded with drivers to ignore Waze recommended directions as it resulted in many drivers speeding down a local street with small kids playing nearby. Going forward, we made the personal decision to forego speed over resident safety and avoided this route.
Investing can also take you down roads that may be morally objectionable, such as companies that invest in weapons, gambling or tobacco for example. Lately the investing world has see huge growth in financial products that merit the benefits of responsible investing and uses both financial return and societal and environmental good to bring about social change.
In addition, many active management proponents use market bubbles in areas such as real estate and technology as examples of why passive investing can sometimes lead investors on a regrettable investment journey. Stocks in these areas became significantly overweight in the index during the bubble, and ultimately once the crash occurred, delivered terrible returns to investors.
Proceed to the highlighted route
Waze does an excellent job in getting you from point A to point B. Even still, many people use additional information such as Google Maps, highway notices and traffic updates via the radio to supplement Waze route recommendations. You may know of your own back alley or road less traveled that you keep as your little secret.
The stock market can work the same way. By using your knowledge of an industry or company you are passionate about or work in, you can give yourself your own investing advantage and faster route along your investment journey. As always, speak to a professional to give yourself an even greater edge.
My wife and I still use Waze everyday, although we also supplement it with our own knowledge of the route and neighbourhood. My wife is still particularly fond of overruling Waze with her own insights, which has resulted in us getting home earlier than expected many times.
Is my wife smarter than Waze? Probably. And considering Google paid $966 million back in 2013 to buy it, I got a huge bargain.