“Discounting” is the term the stock market has traditionally used to describe the process through which the possibility of future company/stock developments, both good and bad, are factored to some degree into today’s stock prices before the actual news becomes public.
How does this happen?
Prior to the financial crisis in 2008, brokerage houses maintained cadres of highly-paid analysts, organized by stock market sector, many of them with extensive professional training and long working experience in the areas they covered. They would use the products and services of the firms whose stocks they covered. They’d also be in constant contact with the companies in question, as well as suppliers, customers, government agencies …and any other sources of information they might think of. And they wrote detailed reports on their observations and their experience of how their firms would fare in different economic circumstances, for institutional customers who in many cases had analysts of their own. And they would also have access to gossip and rumors from within their own firms, which are companies with their hands in many different pies.
Sometimes, though less so since the passage of Regulation FD in 2000, publicly-traded companies will regard brokerage analysts as a public relations vehicle, releasing information to them for dissemination to favored clients (ahead of everyone else), as a way of softening the blow of bad news and at the same time in the hope of coopting analysts into becoming PR vehicles for them.
During the financial crisis, in what I see as the ultimate Wall Street triumph of jocks over nerds, virtually all these multi-million dollar analysts were laid off.
At the same time, financial firms began to realize that they could use algorithms that read newsfeeds and react instantly to relevant information as it’s released, as a substitute for the immense expense of recreating a human research department. And, so long as no one else had a loose, say, $75 million to rebuild a pre-crisis research effort, it really wouldn’t make that much competitive difference if trading bots replaced people.
Yes, there is still a lot of sophisticated information inside brokers’ investment banking units. And, yes, I’m willing to bet that at least some of that leaks out to the rest of the firm. Still, I think the brokerage game has shifted significantly from discounting in advance to rapid reaction.
I think that’s a good thing for individual investors like you and me, who can play the discounting game, at the very least in areas we have or can develop expertise in, and by paying close attention to the malls we visit and our own consumption habits. For us, the only change from the pre-financial crisis days is that information probably travels more slowly, so if we’re acting (as we should be) on information we have that’s not yet in the market we may have to be more patient waiting for others to catch on.