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How Do We Use 21st Century Technology?


Volume 93 No. 11 - November 2022


11-2022 Newsletter
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The world looks very different than it did 50, 30, or even 20 years ago. In the restaurant industry, paper menus are being replaced by virtual menus. In banking, checks can be deposited using a cell phone instead of visiting a branch, and the list goes on. When we think about what has driven much of the change, advancements in technology are first in mind.


Technology has become intertwined with many aspects of our lives. You may have read about terms such as artificial intelligence (AI) and algorithms. These are the two of the most important and widely discussed advancements in technology. Simply put, AI and algorithms are computer systems that perform calculations, utilize data, and make decisions in ways that previously, could only be done by people. They have many applications to many industries.


In our industry of financial services, technology has led people to wonder to what extent it will support firms like ours in the coming years. We are aware that technology can assist us in advising our clients and executing our business. We explore those advances in technology to make sure we maintain the right mix of automation, personal experience, and expertise when working with our clients. So, how do we embrace the technology of the 21st century?


Market Monitoring


In past newsletters, we have mentioned our approved stock list, a list of securities that have passed our quantitative and qualitative criteria for investment. The list is comprised of equities that we believe offer opportunities to preserve and grow our clients’ capital.


When we dig into our archives of past newsletters, we find old ledgers with past approved stock lists, written in fancy Palmer-method handwriting. These days, we appreciate that history, but we now rely on computers and computer programs, including algorithms, to monitor the market for movements that may influence the composition of our approved stock list.


Our approved stock list contains every stock that we own, and we use algorithms to create alerts as indicators for events that we monitor and, at times, act upon. The most frequent category of alerts relates to the release of company earnings—a major driver of stock price movements—but we also use alerts related to economic indicator research published by the US Bureau of Labor Statistics and other macroeconomic and political-economic drivers.


Our market monitoring alerts focus on questions such as:

· Do a company’s recent financial results signal a shift in past and expected performance, and in the underlying financial, operational, and competitive health of the company?

· Has the management team changed in composition, or shifted its focus? Have they fulfilled their promises to investors?

· How will changes in the macroeconomic and political environment affect the company’s future performance and competitive and regulatory environment?


Security Selection, But Not Security Trading


While some firms have begun relying on computers to execute their stock trades, over-reliance on technologies that place large numbers of automated orders at ever-increasing speeds comes with risks. At a macro-level, algorithmic trading can worsen market volatility, resulting in more trading activity. Also, the release of economic data from government institutions can cause a spike in trading activity. These orders largely trigger without any human intervention and can exacerbate the effects of major news events.


Algorithmic trading intensifies the heightened volatility we have seen in recent years and can contribute to market uncertainty and even impact consumer confidence. Like the people who create them, algorithms can be wrong and can contribute to investor losses and erode confidence in the integrity of financial markets.


We still personally determine each trade by physically entering them to your custodian trading platform. We make our decisions after careful analysis, consulting our collective knowledge and expertise, and considering a client’s individual circumstances.


Our use of technology in security selection helps us consider a broader range of stocks in a shorter amount of time. Say, for example, we are looking for a technology stock. We can utilize computer software to screen for and identify tech stocks with a below-average price-to-earnings ratio, above-average revenue growth, and an above-average dividend yield. In the days of pencil-and-paper analysis, that research may have taken a team days to pull together and reach a conclusion.


With technology supporting our security selection, we can input those criteria and instantaneously receive a list of company names on which to do further research and analysis before we decide which of those securities will be added to our approved stock list.


The takeaway is that our security selection and trading reflect the experience and knowledge we have developed as a firm over time and includes elements of our quantitative and qualitative analyses. Even in an age of technological advancement, we cannot just “take what the computer spits out.” It is our analysis and the application of our collective experience that makes our firm what it is.


Quarterly Statements and Calculations of Performance


We also apply technology when we produce client statements and determine portfolio performance. It may seem like an obvious statement, but, at one point in the not-so-distant past, we calculated all client performance by hand and reviewed those calculations by hand, in ledgers with all the signoffs and approvals you might expect to see in a midcentury investment advisor’s office.


Today, our calculations of portfolio performance can be accomplished by our portfolio management and reporting system. Statements can be generated at any time and under whatever criteria we need for the analysis we are creating. Automated testing on the calculations of our spreadsheets have replaced a supervisor’s red review pen, in nearly all circumstances.

Conclusion


Since our founding, we have evaluated and implemented the technologies that complement the strengths that each of our employees brings to the firm. It is the people behind the business and technology that have made our firm what it is. Advancements such as AI and algorithms are tools that can be used but are not a replacement to human expertise.


We believe it is important to remember the human component behind every technological advancement and to never forget the value that education and experience can bring to any investment decision. We also believe that other critically important aspects of our business, such as client service, are best accomplished with the expertise of our employees, with the assistance of technology, not the other way around. We value each of our relationships with clients, knowing them personally, and delivering customized portfolios and exceptional client service.


Even as times change and our society increasingly looks to technology to shoulder the burden of the work, we believe technology should support the people who form the lifeblood of a firm, and not the other way around. Technology optimizes, but never replaces our people.

 

Investment Counsel Inc., a Division of LaFleur & Godfrey, is a registered investment adviser. Registration does not imply government endorsement or that the advisor has attained a level of skill or training. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. *This newsletter was offered by our predecessor, Investment Counsel, Inc. from 1929 to 2021.

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