Signal versus Noise

by | May 1, 2018 | Investor Behavior

News (or noise) can be difficult to separate from facts (or signals).   As an industry, Wall Street is LOUSY at communicating.
Look at this headline from Marketwatch last evening: ?

Why investors should dread the month of May—especially this year
Published: Apr 30, 2018 4:46 p.m. ET

Question: if you are an INVESTOR, why in the world should one month matter?

Signal Versus Noise

This Marketwatch article linked above discusses seasonally strong periods (November through April) and seasonally weak periods (May through October) in markets. That is good information to know — if you are a TRADER.  In many ways this information may be meaningless (or even harmful!) if you are an INVESTOR. I shake my head when I see headlines and articles like this appear in well-read websites and publications.

I’ll share a tip I use nearly all the time. When your favorite stock market website or publication uses the term “investor” substitute the word “trader.”  Now see how the outcome may change. A headline like “InvestoSignal versus Noisers bid up stock prices” would then become “traders bid up stock prices.”

And my reaction would be, “And? So?”

Likewise, a headline like “investors flee from bonds” becomes “traders flee bonds.” Folks (investors) naturally could get nervous (or worry) when they see headlines like these.  And sometimes people think, “look at that news — shouldn’t I be DOING something?”

Worry can take two forms: signals and noise.

Signals prompt you to take action because signals come with solutions. Noise comes with no solutions. Simply put, noise is static.? It’s often (mostly) noise that pushes markets around on a day-to-day basis. No one knows the real motivation behind a big seller in the marketplace on any given day.  Separating signal from noise will guide us in the right directions.  This helps us stick with the longer term trends. We want to pay attention to signals, and try to remove the noise.

And there is a LOT of noise in the daily markets. In the kind of market we’ve seen so far in 2018, it’s important NOT to make decisions based on noise.

In this mornings’ meeting, Brendan reminded us about Charles Ellis’ book, “Winning The Losers Game.”  In the book, Ellis discusses how the amateur tennis players routinely lose matches to more seasoned (or the more professional player) often by simply committing unforced errors in the match.  The amateur feels he (or she) needs to “do something special” to keep up with the better (or more experienced) opponent.  Many times the amateur screws up their own game by trying to do something special.

The more seasoned player succeeds more often.  And not necessarily because they may be more skilled, but rather because they play their OWN game.  They focus on reducing the number of unforced errors.  We should aim to do the same thing with our investments.  Here is a great example: reacting (trading/buying/selling) on a news flash or on headlines is an easy way for long term investors and savers to commit “unforced errors.”

Even though the headlines and stories may spell out how (for example) “investors flee bonds” keep in mind my little tip.  Re-read the same headline, replacing the term “investor” with “trader.”  Now see if this really means anything to you.  Once you get the hang of replacing one term for the other, you will discover there is an awful lot of noise in the marketplace.

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