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Filter Failure? The Dow is Back. Funds Are Not.

The stock market has completed its climb back. On Oct. 28, the Dow Jones Industrial Average closed at 11,114. On April 28, the average had closed at 11,046.

Then came May 6 and the Flash Crash supposedly tripped off by the now-famous plan by Waddell & Reed, the mutual fund complex in Overland Park, Kansas, to sell 75,000 contracts worth $4.1 billion in E-mini futures contracts.

By the end of May 7, the Dow was down to 10,380. On July 2, it closed at 9,686.

Now the Dow is back. But the money from Aunt Minnie in Kansas City is not.

Main Street investors pulled another $202 million out of mutual funds investing long-term in U.S. stocks, in the week ended Oct. 20, according to the Investment Company Institute. In the week ended Oct. 6, investors pulled $5.4 billion out of such mutual funds. All told, $80 billion has been pulled out in less than half a year.

The problem? Too much fear. Too much data. Too much opinion. All at once, according to Michael Aronstein, president and portfolio manager for the Marketfield Fund.

Call it information overload. Or, simply, information risk.

"It's an enormous problem," Aronstein said. "It's emotional."

Particularly, when it comes to something "as complex as macroeconomic opinion and the state of the world and economics. It's really driving people crazy, because the data is all contradictory, and the opinion set they're exposed to also is pretty contradictory," Aronstein said.

First, the credit crisis and then the Flash Crash have given Aunt Minnie the shakes. This spring, emotions were running high on whether there would be a second dip in the recession, based on job and housing data coming out of the government.

"All that data was very misleading and probably not particularly accurate in terms of giving people a snapshot of economic activity," he said. "I think for the most part, people are not equipped to judge what is a valid and what is a not valid opinion, because they all sound plausible."

The problem isn't information overload, though, argues Clay Shirky, a well-known instructor in interactive communications at New York University. Brains have been overloaded ever since that library was built in Alexandria roughly 2,500 years ago. "There's only filter failure," he says.

Meaning: the technology of screening media for what is significant and worth paying attention to, whether it affects investing in mutual funds, the managing of funds, or any other part of the economy, is not keeping up with rapidly escalating sources of information or opinion.

Thousands of news articles and opinions can be found at an instant, online, but which ones count?

One company trying to sort this out is Comintelli, based near Stockholm. Its Knowledge XChanger software is a filter for automatically screening large volumes of information, prioritizing what is valuable and making the whole organized and more searchable, according to its chief executive, Jesper E. Martell.

The tool uses a classification engine to sort incoming information into topics that match what the corporate or individual user is interested in. The information can come from external sources, such as research reports, websites, blogs and news feeds, as well as internal sources, such as e-mail, shared files and local folders.

The flow of information can be winnowed to more useful, core information by, in effect, editing. One means is for the user to prescribe which sites or sources are of sufficiently high quality and reliability, to be worthwhile sources. Information from other sites or sources gets blocked.

A second means is more manual. Investment managers or analysts take on the task of filtering research and articles that are allowed to be disseminated to staff or clients. Only articles that are approved for "publishing" get distributed.

"You have to find a few people that you trust," Aronstein notes. "And use your common sense."

Then there are graphical means of providing some sense of what merits attention. One tool supplied with the Knowledge Xchanger is a "Matrix Analyzer" that sorts the number of incoming articles or other pieces of information along two axes-perhaps economic topics and the geographic places from which they emanate. The tallies get sorted by number and color, creating a "heat map" of hot and cold cells.

But it's still up to the user to drill down into what is said. Which means the brain and the heart still come into play.

"When people look at what's just happened to them over the past two to three years, they have a very very hard time approaching the investment process rationally," Aronstein said. "Because it was traumatic. It was extremely traumatic."