Efficient Financial Markets and Google Application
Tuesday, March 21, 2006
Working my way through a Master of Business Administration (MBA), at Wilfrid Laurier University
, has made me a bit more sensitive to financial news and a bit more curious about all those interest rate hikes (Greenspan was a genius).
Aside from reading a million pages every week, as part of our training, we (the grad students) perform various financial analysis on different companies to get graded on the results. We also do the typical financial student thingy: finding out the Cost of Capital (WACC) for capital budgeting matters, figuring out required rates of return for equities (CAPM), calculating different financial ratios, finding market betas of different industries, study portfolio theory, etc., etc.
Most importantly, as future captains of industry*, we are inculcated that first world economy markets are said to be "efficient."
Efficiency in this context means that the market responds quickly to publicly available information. By "market" I mean the equity market or stock market; by "respond quickly to publicly available information" I mean that the price of a share is representative or valued depending on the information available at the moment of a trade--no more, no less. (Think of Nortel's share prices tanking when it was reported that they under-reported earnings a couple of years ago--the market reacted to the news and the stock price dropped rather quickly.)
So, why am I blabbering about this?
Well, google released a web application called Google Finance (finance.google.com and it's on beta of course), which makes use of the fact I just outlined above: the price of a share is dependent on the information available to the public.
With this web app, google once again shows its shareholders where all that money in R&D is going to: clean designed Flash applications that actually work.
Check this out (note the letters in the little squares):
Ok, plotting graphs is not that impressive (everyone and their dogs can do it if you have the raw data). What's really cool and the connection to freely available information is this:
If you noted the letters inside the squares, you'll see what they are and how they are used: they are links to news that were published on that particular day. For example, you can see how the price of google's shares were related to the news of the day. You can also slide around the graphs and see the peaks and valleys, and the news section changes depending on the period displayed in the graph (cool AJAX
Pretty cool stuff and quite useful to Financial Analyst (and of course, for the amateur investor or business student). However, will news sites ever tell google to stop using their content for its own purpose?
At some point, I think they will.
I'm also predicting google will buy or license "real life" and index everything we do in their massive server farms. Gone will be days of you forgetting to pick up your kids from soccer practice: google will have an RSS feed reminding you on your cerebral google implant.
If it's information google can and will index it...And display ads through out...By the way, did you click on the google ads to your right? ;)
If you don't want to commit to going to finance.google.com, I have a local
screen grab of what the whole search result for google looks like (man, there's a lot of information available in that page).
* Note that an MBA is probably not the most direct path to become a "captain of industry." In my class, there are about as many reasons for getting a Master's degree as there are students. Are there any captains of industry amongst us? Only time will tell, however my mention of it at the beginning of this post shouldn't be taken too seriously--my head is quite small and we need to learn to not take ourselves too seriously.