Thursday 11 August 2016

Filtering out the noise

Author Note: This blog is about “Forgetting the Noise”. I thought it would be appropriate to share a modified excerpt from my book.

Noise causes us to behave irrationally. It preys on our biases. The financial press is full of noise. Yes, the press. You can’t live with them but you can’t live without them. I will not be the first to highlight the damage the financial press causes. The Internet has certainly not helped matters. For all the good the Internet has done, it has been the worst thing for financial markets. Information (or rather “noise”) now travels at the speed of light, intoxicating its readers and convincing them to take action.

To protect yourself, you need a filter – a very good one. For some, this means not reading the financial press and not watching financial TV channels. Some (the lucky few) are still able to be consumers of the noise but possess the talent to ignore it.

Personally, I think I sit somewhere in the middle. I follow a little bit. I read one financial publication (The Economist) but tend not to watch any Bloomberg TV or CNBC. I don’t read the business newspapers either. I do, however, use certain web services which search product news and fundamental financial information on companies I am interested in (one of my filters for the noise). I also follow the SENS news service in South Africa, which publishes regulatory information, financial results and trading updates on South African listed companies.

The point is that you need to work out where you sit. If you suffer from FOMO (aka fear of missing out), then it may be best to shield yourself completely from the financial press. I would recommend erring on the side of doing more filtering out than less. We like to think we are immune to market fads and speculation, but the reality is that we fall victim to them more frequently than we think.

Noise makes you do stupid things. It makes you sell investments at the worst possible times. Noise is also comforting. We are always looking to find the causes of events or the reason for something happening.

I am the first to admit it is far easier to write the above than actually put it into to practice. I can guarantee you that at some point in your life, you are going to see an investment drop at least 20% from the price you paid for it. No matter what anyone says, this is a painful (but hopefully short-lived) experience. It is even more painful in magnitude than the corresponding amount of joy that we would experience if the investment doubled in value. Why is this the case? I put it down to my belief that we don’t like to lose and that we always expect to win – i.e. we believe that we make the best decisions. The academics call it loss aversion or prospect theory. defines it as follows:
“A theory that people value gains and losses differently and, as such, will base decisions on perceived gains rather than perceived losses. Thus, if a person were given two equal choices, one expressed in terms of possible gains and the other in possible losses, people would choose the former.” 
Why am I telling you this? You need to devise the fail-proof filter I mentioned earlier. Here I am going to give you a list of steps that I refer to every time I start to get that sick-in-my-stomach “I can’t believe this is happening” feeling. You may find my list useful as-is, or you may want to add to it. The point is that you need something to refer to and prompt you to start thinking rationally again.

I ask myself the following questions:

  1. Is the sun going to rise tomorrow?
  2. Is it still better to have monetary assets than returning to the barter system?
  3. Are my investments’ earnings related to the level of prices in the world (e.g. inflation)?
  4. Do I have a diverse number of income streams so that I am not dependent on any one income stream? (i.e. do I own numerous companies in different industries?)
  5. Does my investment portfolio address all the other deep risks (i.e. risks other than inflation?)

If I can answer “Yes” to these five questions, then I carry on. No matter how many headlines I read about the dire state of the world and the unsustainability of this and that, I continue my investing strategy. You may argue that my list is too simple. This is intended. It is five questions I can ask myself quickly to check my state of mind.

For more on ignoring noise purchase a copy of Forget the Noise on Amazon.

Written by: Geoff Noble
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