The Rate of Change

When I first started talking about the opportunities with artificial intelligence, I called it the "low-hanging fruit"—the simple but transformative ways businesses could begin to use AI.

Back then, there was a clear gap between talking about AI and its actual use in organisations. I believe for many that gap is still there, but what is hard to take on board is the speed at which AI is progressing. It's exponential.

Tools like GPT-4 have gone from being a curiosity to part of the toolkit in less than two years. Further, it's not just OpenAI; there is plenty to choose from. And the only way to understand what AI can do for you is to start using it—see for yourself just how quickly it can change your day-to-day work.

AI feels like using spreadsheets back in the 1980s. Not everyone was convinced they were useful. But those who took the time to figure them out quickly saw how much easier they made things. What's more, for those of us in trading, it gave us the edge—and that meant money.

Let me give you an example from my own recent experience. Last week I wrote Headlines Don't Matter. Using Google's NotebookLM, I took that post and turned it into multiple formats, each tailored to a different need:

Briefing Doc: Headlines Don't Matter

Theme: This excerpt argues that constantly reacting to daily news headlines is detrimental to financial decision-making, especially for long-term investors. Instead, it advocates for focusing on building resilience and flexibility into financial systems to weather unforeseen economic shocks.

Key Ideas and Facts:

• Short-term volatility is irrelevant: Daily economic events and news, while seemingly impactful, are quickly overtaken by new developments and do not materially affect long-term trends.

  
  

"The reality is that what’s news today will be overtaken by events tomorrow."

• Predicting the future is futile: The author emphasizes the inherent unpredictability of the future, citing COVID-19 as a prime example of an unforeseen event with dramatic consequences.

  
  

"As for next month or next year, there’s absolutely no way we can determine what will happen."

• Focus on resilience, not prediction: Instead of trying to predict the unpredictable, the author recommends building systems robust enough to withstand shocks.

  
  

"We need to focus on the degree of flexibility we have in the systems or businesses we are running."

• Historical examples of impactful shocks: The excerpt highlights major historical events like the 1973-1974 Oil Crisis, Black Monday (1987), and the Global Financial Crisis (2007-2008) as examples of unpredictable events that caused significant and lasting economic disruption.

  
  

"These were all completely unpredicted; the sequence of what unfolded was beyond comprehension at the time."

• Practical steps for financial resilience: 

• The excerpt suggests concrete measures to enhance financial resilience, including:

• Maintaining sufficient liquidity and capital reserves

• Diversifying credit risks

• Avoiding illiquid long-term assets

• Resisting the allure of high-risk, high-return investments in unproven areas

Quotes of Note:

• "Reading too much into the news is positively damaging to financial decision-making."

• "These are the very types of things we need to protect ourselves against in the future. But here's the paradox: you won’t read about them in the news until it’s too late."

• "By avoiding the trap of reacting to every piece of news, we position ourselves to better withstand the unpredictable shocks that truly matter."

Overall Message: This excerpt encourages a shift in perspective from short-term reactivity to long-term strategic thinking in financial decision-making. It advocates for building systems that are inherently robust and adaptable, enabling them to weather unforeseen challenges and thrive in the face of uncertainty.

FAQ: Headlines Don't Matter

1. Why shouldn't I base my financial decisions on daily headlines?

Daily headlines often focus on short-term market fluctuations and breaking news that may not have a lasting impact on your long-term financial goals. These headlines can create a sense of urgency and encourage impulsive decision-making based on fear or speculation. The reality is that markets are constantly evolving, and trying to time them based on daily news is generally ineffective and can even be detrimental.

2. But what about major economic events? Don't those matter?

Yes, major economic shocks do matter, but they are unpredictable and impossible to anticipate based on daily news. The events that truly reshape the financial landscape, like the 1973 oil crisis or the 2008 financial crisis, are often black swan events that catch everyone off guard.

3. If I can't rely on news, how can I make informed financial decisions?

Instead of reacting to headlines, focus on developing a sound financial strategy based on your long-term goals, risk tolerance, and financial situation. This includes diversifying your investments, maintaining adequate liquidity, and having a plan to manage unexpected expenses.

4. What about expert analysis and predictions? Can't those help?

While expert analysis can provide valuable insights, remember that even the most experienced analysts cannot predict the future with certainty. Economic forecasts are based on assumptions and models that can be disrupted by unforeseen events. Instead of relying solely on predictions, focus on understanding the underlying fundamentals of the market and your investments.

5. So, are there any situations where paying attention to the news is helpful?

Yes, staying informed about broader economic trends and policy changes can be helpful for understanding the context in which you are making financial decisions. However, avoid making knee-jerk reactions based on sensationalized headlines or short-term market movements.

6. How can I protect myself from unpredictable economic shocks?

The key to navigating unforeseen events is to build resilience into your financial strategy. This involves:

• Maintaining liquidity: Having enough cash reserves to cover expenses and avoid being forced to sell assets at a loss during market downturns.

• Managing risk: Diversifying your investments across different asset classes and geographies to reduce exposure to any single event.

• Avoiding excessive leverage: Don't take on more debt than you can comfortably manage, especially when interest rates are rising.

  
  

7. What should I do when faced with a major market downturn?

Resist the urge to panic sell. Remember that market downturns are a natural part of the economic cycle. Instead of making impulsive decisions, review your long-term financial plan, consult with a financial advisor if needed, and consider opportunities to buy undervalued assets.

8. What's the main takeaway when it comes to news and financial decisions?

Focus on what you can control: your own financial plan, risk management, and long-term goals. Don't get caught up in the daily noise of headlines. Stay informed, but make rational decisions based on sound principles rather than emotional reactions.

A Study Guide: Headlines Don't Matter

Short-Answer Quiz

Instructions: Answer the following questions in 2-3 sentences each.

1. Why does the author argue that daily headlines are irrelevant for most investors?

2. Explain the difference between price takers and price makers in the context of the treasury market.

3. How does the author characterize the relationship between news consumption and financial decision-making?

4. What specific characteristics do the major economic shocks listed in the text share?

5. Why does the author use the example of COVID-19?

6. According to the author, what is the paradox of preparing for major economic shocks?

7. How does the author define flexibility in the context of financial businesses?

8. What does the author recommend regarding liquidity in managing financial businesses?

9. What advice does the author offer concerning investments in long-term assets?

10. What is the main takeaway from the excerpt regarding navigating financial uncertainty?

    
    

Short-Answer Quiz Answer Key

1. The author argues that daily headlines are irrelevant for most investors because they are primarily focused on short-term fluctuations and speculation, which do not significantly impact long-term investment strategies. Most investors are "price takers," meaning they react to market prices rather than influencing them.

2. Price takers, like most investors in the treasury market, accept the prevailing market prices. In contrast, price makers, such as large institutional investors, have the power to influence and set market prices through their trading activities.

3. The author suggests that excessive news consumption can negatively impact financial decision-making. The constant influx of information, often negative and speculative, can lead to anxiety and impulsive decisions, deviating from well-considered long-term strategies.

4. The major economic shocks listed in the text (e.g., the 1973-1974 Oil Crisis, Black Monday, the Global Financial Crisis) share the characteristics of being unpredictable, unprecedented in their unfolding, and impactful enough to cause lasting changes in economic and financial systems.

5. The author uses the example of COVID-19 to illustrate the unpredictable nature of major economic shocks. Its sudden emergence and widespread impact highlight the limitations of forecasting and emphasize the need for flexibility and preparedness in financial strategies.

6. The paradox of preparing for major economic shocks is that they are inherently unpredictable and often unforeseen. This means that while planning is crucial, the specific events we prepare for may differ significantly from the actual shocks that occur.

7. The author defines flexibility in the context of financial businesses as the ability to adapt and withstand unexpected economic downturns and market volatility. This involves maintaining sufficient liquidity, diversifying risks, and avoiding overexposure to illiquid assets.

8. The author recommends holding sufficient liquidity in financial businesses to provide a buffer against unexpected losses and market downturns. This allows businesses to weather financial storms without resorting to drastic measures that could compromise their long-term stability.

9. The author advises against excessive investments in long-term assets that are difficult to liquidate during times of market stress. Holding a significant portion of illiquid assets can limit a business's ability to respond effectively to sudden market changes and economic shocks.

10. The main takeaway from the excerpt is that focusing on long-term strategies and maintaining financial flexibility is more effective than reacting to short-term news and market fluctuations. By prioritizing resilience and preparedness, businesses and individuals can better navigate the unpredictable nature of financial markets.

Essay Questions

1. Critically evaluate the author's argument that daily headlines are irrelevant for long-term investors. Do you agree or disagree? Provide specific examples and evidence to support your position.

2. Discuss the challenges and benefits of maintaining flexibility in financial management. How can businesses balance the need for stability with the ability to adapt to unforeseen circumstances?

3. Analyze the impact of the major economic shocks discussed in the text on global financial markets. To what extent have these events shaped current financial practices and regulations?

4. Explain the author's concept of "price takers" and "price makers." How do these roles influence market dynamics and investment strategies?

5. Develop a comprehensive plan for a hypothetical business to prepare for potential future economic shocks. Consider specific strategies for managing liquidity, diversifying risks, and maintaining operational flexibility.

Glossary of Key Terms

Bid-Offer Spread: The difference between the price a buyer is willing to pay (bid) and the price a seller is willing to accept (offer) for a security or asset.

Capital: Financial assets or resources used in the production of goods and services.

Credit Crunch: A sudden and severe shortage of credit availability, typically caused by a loss of confidence in the financial system.

Dow Jones Industrial Average: A stock market index that tracks the performance of 30 large publicly owned companies listed on the New York Stock Exchange (NYSE) and the Nasdaq.

Economic Indicator: A statistic used to assess the overall health and performance of an economy, such as GDP growth, inflation, or unemployment rates.

Exchange Rate Mechanism (ERM): A system used by European countries to maintain stable exchange rates between their currencies before the adoption of the euro.

Global Balance of Power: The distribution of political, economic, and military power among nations on a global scale.

Inflation: A general increase in the prices of goods and services over time, leading to a decrease in the purchasing power of money.

Liquidity: The ease with which an asset can be converted into cash without significant loss of value.

Price Maker: A market participant, typically a large institution, that has the power to influence and set market prices through their trading activities.

Price Taker: A market participant who accepts the prevailing market prices without having the ability to influence them.

Recession: A significant decline in economic activity, typically lasting for two or more consecutive quarters, characterized by negative GDP growth, rising unemployment, and reduced consumer spending.

Solvency: The ability of a company or individual to meet their long-term financial obligations.

Sterling: The currency of the United Kingdom, also known as the British pound.

Subprime Mortgage: A type of mortgage loan granted to borrowers with lower credit scores and higher risk profiles.

Treasury Market: The market where government securities, such as bonds and bills, are traded.

Podcast: Headlines Don't Matter

I asked the AI to discuss the blog from the context of a Non-Executive Director:

Untitled notebook-2

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This is just scratching the surface. AI can take one piece of work and turn it into committee meeting notes, onboarding materials, regulatory documents, or client communication—all in a matter of minutes. It’s incredibly versatile.

The podcast was a revelation.

It opened up a new way to disseminate information to people who prefer to listen rather than read, and what’s more, you can tailor the content specifically to the audience.

My work habits have changed. I turn to Large Language Models, they save time and often give better results whether that's for finding information, making sense of it or using it to provide insight to others.

I didn’t learn that from reading about AI—I learned it by using it.

A year ago, I wrote: “Large Language Models (LLMs) like GPT-4 are democratising AI, granting anyone the potential to enhance their tasks—the only requirement is the willingness to embrace it.” That’s true today. The benefits are there for the taking, and getting started isn’t complicated. Sign up and experiment with it, and see what it can do. It’s that simple.