Ignoring Noise Is Impossible
Just ignore the noise!
Many financial advisors have said those words over the years. They give you phrases like this when you get your CFP. It’s sound advice.
But there is a difference between good advice and effective advice. There is a lot of good advice everywhere you look these days but many people just ignore it because it is not easy to follow.
Good advice you preach to your clients to stay the course.
Practical advice build portfolios that last long and are ethical enough to help clients stick to their plan.
Good advice it is to ignore the noise.
Practical advice is to create a comprehensive investment plan that focuses on those things under your control.
It’s almost impossible to ignore the noise today because you have a rectangular supercomputer in your hands all day bombarding you with news, alerts and social media posts.
Yes, in one way or another, markets need sound to work. Fisher Black wrote the following in his aptly titled research paper, sound, back in 1986:
The effects of noise on the world, and on our worldviews are profound. Noise in the sense of a large number of small events tends to be a more powerful cause than a small number of large events would be. Noise makes trading in financial markets possible, and thus allows us to observe the prices of financial assets. Noise creates inefficiencies in markets, but often prevents us from exploiting inefficiencies. The noise in the state of uncertainty about future preferences and technologies in the sector causes a business cycle, and makes them more resistant to development through government intervention.
Noise makes financial markets possible, but it also makes them imperfect.
The noise is endless so what should you do with it?
The way I see it there are two ways to deal with the firehose of noise in the information age:
(1) You learn to live with it.
(2) He keeps himself busy with other things.
In Power of Habit, Charles Duhigg tells the story of Tony Dungy’s NFL coaching trajectory. Dungy was often passed over for the head coaching job early in his career because many organizations thought his philosophy was too simplistic.
Dungy kept things simple on purpose.
He wanted his players to follow a repetitive process so that they did not make too many decisions during the game. The problem came when the players ignored the process and followed their instincts:
“We were practicing, then everything came together and when we got to the big game it was like practice disappeared,” said Dungy. “After that, my players would say, ‘Well, it was a serious game and I went back to what I knew,’ or ‘I felt like I had to step it up.’ What were they? indeed they said they trusted our system most of the time, but when everything was on the beach, that belief disappeared.”
What finally clicked with his players on the Bucs and Colts (where he won the Super Bowl) was the idea that you have to believe in your plan all the time, not just when you hear it. Your brain only has a limited capacity so developing good habits that become second nature can help you avoid overreacting.
On the other end of the spectrum, some people ignore the noise by living their lives.
I was on the phone with a customer this week. I had a fair market update with charts about oil, geopolitical risk and more to put the environment in perspective.
I then asked the client what he thought about the situation.
I really wasn’t paying attention. I have so many other things going on in my life and I’m working right now.
That was music to my ears.
In his poem, A Little Lesson, Alexander Pope once wrote:
Little learning is dangerous;
Drink deep, or taste not the well of Pirian:
There are shallow drafts to intoxicate the brain,
And drinking makes us sober again.
The worst place to be is caught in the middle between profound understanding and blissful ignorance.
Michael and I talked about all the buzz going on in the markets with this week’s Animal Spirits video:
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Further reading:
Preparation Without Prediction
Now here’s what I’ve been reading lately:
Books:
