Does Big Data Lead To More Value Traps?

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During his recent interview with Tobias, Jack Forehand, Partner at Validea Capital Management, discusses whether big data leads to more value traps. Here’s an excerpt from the interview:

Tobias Carlisle: The next point you make, which I think is a an interesting one, big data leads to more value traps, which are things that are genuinely, even though they might screen as undervalued, they really are just bad companies.

Jack Forehand: Right, so the example I use in the pieces, I was using the example of Walmart, which may not be a value stock right now, but it’s just for example purposes. If Walmart is really cheap in my value strategy based on past earnings likes Walmart, well, what happens with this new data, hedge funds have drones up over Walmart and they see that the parking lots are empty, or they have all the credit card data and they see that people are spending less money at Walmart, what if there’s data out there that’s not reflected in past fundamentals that may make those past fundamentals less valuable?

Jack Forehand: And that was the argument I was making is there might be stuff out there now that people who use historical fundamental statements in the past that was not available, that maybe changes how valuable historical, fundamental statements are now. It’s another tough one to try to figure out whether it’s true or not. It’s a tough one to prove, but I think it is true that there’s more data now and people are doing everything they can to get that data, and maybe that makes the piece of data we use, which is historical fundamental data, less valuable.

Tobias Carlisle: I sometimes wonder whether that arms race to create more data and better AI and machine learning to analyze it if it all just cancels itself out. Buffet gives that example of people going to the, you go to some parade and everybody stands on their toes to get a better view, which eliminates the effort of everybody else. Does all of that big data cancel each other out because everybody gets that hedge pretty quickly and so then you just go back to historical financial statements?

Jack Forehand: That’s right. If there is a valuable data set out there, whoever owns it is going to sell it to as many people as they can possibly sell it to. And so whatever edge is associated with that is going to go away pretty quickly as all the other hedge funds pile on and try to use it. So that’s probably a good argument against what I’m saying, but I still want to recognize that data is out there and people are using it and maybe it devalues the data we’re using.

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