For Investors, Faster Isn't Necessarily Better: Learning From Instagram's Missteps in the Age of High Speed Information
Dover, DE: In a world where information can be shared across continents in the blink of an eye, businesses and private investors are pressed with ever-increased pressure to make rapid investment decisions. Stock selection is often based on the latest statistical data such as price to earnings ratios, price to book value and earnings per share. But decision-making by corporate leaders, especially when conducted too rapidly and without careful consideration, can injure their stakeholders and bring investors’ research to waste. Instragram, a popular photo sharing and filtering company with over 100 million active users as of September 2012, is one of the companies that fell into this high-speed trap.
Recently, a decision was made by Instagram’s corporate leaders to distribute what was considered proprietary information. The language of the new terms of service implied that Instagram had the right to license users’ photos to companies, including advertisers, making Instagram in essence a free-for-all photo bucket. This decision nearly torpedoed the efforts and reportedly billion dollar investment by Facebook, who had completed its acquisition of Instagram three months earlier. And while Instagram is based on a platform delivering creativity in the blink of an eye, the speed of information, when delivering good or bad news, can adversely impact a business or an entire industry in ways previously unseen.
Nassim Taleb, a derivatives trader and quantitative analyst,conducted research demonstrating that “the way a risk is framed influences people’s understanding of it.” Mr. Taleb’s research can be applied to the events that occurred with Instagram’s so-called “Christmas day revolt.” When poor decision making is coupled with the rapid distribution of information, chaos ensues.
An example of this chaos can be found by looking at Knight Capital Group, a firm that trades for retail brokers, whose trading algorithms nearly tanked the company overnight. Knight Capital developed new software that executed trades at the blinding speed of (allegedly) 40 trades a second. Unfortunately the program went into hyper-drive and began purchasing huge swaths of stock, by buying at the ask price and then instantly selling at the bid price. The trades were then replicated, with looses of hundreds of millions of dollars. As quickly as the losses developed, the bad news traveled even faster.
In 2013, “change” will occur quicker than ever before. And when adverse events happen, extraordinary harm often comes to corporate stakeholders. In the case of Knight Capital, the recent harm cost investors over $400 million. As with Knight Capital, Instagram has shown a lack of foresight to properly adapt in any meaningful way when the speed of information truly matters. And while Instagram has seen a spike in use again after co-founder Kevin Systrom issued an apology and cleared up the confusion surrounding photo rights, the long-term impact to Facebook may be even greater. Facebook’s stock dropped approximately 3% after the Instagram faux pas.
In a time where the velocity of change creates a future that is far less predictable, companies should focus on ways to prepare for unanticipated events, and investors need to look deeper than historical trends. After all, history's roadmaps don't show potholes, and we can’t drive into the future with our eyes glued to the rear view mirror.
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About Brad Barros:
Brad Barrosis Managing Director and co-founder of Attainium Capital Development Advisors, LLC(Attainium). Over the past 35 years, Attainum’s founding principals have worked with hundreds of successful privately and publicly held businesses, designing and implementing benefit, insurance and risk-management solutions effectuating more than $4 billion of benefits with programs involving more than $300,000,000 of recurring annual insurance premiums.
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