Why Cutting Through Noise is a Sound Investment Strategy
Noise is the enemy of information – a premise that is especially true for investing. Cutting through the noise and listening to what matters is critical for those who want to invest with clarity and not be distracted by sounds which are irrelevant to their objective.
Business TV channels, financial publications and online news and opinion outlets exist to inform their audience. But they also exist to make money through the selling of advertising and subscriptions. The result: they must intensify the hubbub of news – regularly adding value through outside experts and viewpoints, but also increasing the general melee of noise as 24/7 schedules must be filled.
Excessive data and soundbites can have a profound effect. The US economist Fischer Black stated in his seminal paper (Noise, 1986), “Noise causes markets to be somewhat inefficient, but often prevents us from taking advantage of inefficiencies.” A surplus of noise can therefore paralyse or cause us to react rather than act. Black believed noise to be the opposite of information.
The Proliferation of Noise is Rising
Noise has amplified many times since his assertions: through the internet, the proliferation of dedicated financial channels and publications and within the echo chambers of social media. Everyone, it seems, wanting to have a meaningful say, all wanting to get their voice heard.
As an example of increased demand (and supply), between 2006 and 2015 revenue doubled for the business-focused channels of CNBC, Fox Business and Bloomberg according to the Pew Research Center in 2016. Yet while there is a great deal of quality to be found in financial reporting there are sensible ways to counteract the impact of noise.
As our Chief Economic Strategist, Gerard Lyons, says, “The outlook depends upon the interaction between fundamentals, policy and confidence, and while all matter, we must not lose sight of the fundamentals.”
Frequently, contagion can spread from one region of the world to another. The trigger, for instance, could be unexpectedly poor economic news such as sluggish GDP figures. But other countries may only suffer a short-term adjustment if their fundamental outlook remains essentially positive.
Equally, a region may receive negative coverage due to political instability, but this may have little effect on a territory’s businesses and their ability to deliver consistent growth. Yet the region’s markets may still suffer in the short term due to excess noise.
The Individual Effects of Noise
While it is wise to be aware of how noise can affect markets and investments, perhaps it is more prudent to cast our gaze inwards. As the economist and professor Benjamin Graham (the mentor of Warren Buffett and champion of value investing) said, “The investor’s chief problem – and even his worst enemy – is likely himself.”
This statement, and Graham’s belief behind it, relates to our temperament and behaviour and how we respond to various factors – such as the din of noise.
Noise can lead us to follow the herd, it can overload us with conflicting information and choices and make us buy or sell investments on impulse.
At Netwealth, our approach is to focus on our core philosophy of investing efficiently, and we work with an understanding that markets can deliver a wide range of potential outcomes. We make investment decisions on a strategic basis, and accept the ripples of interference that so often capture the airwaves.
By being aware of market noise we consciously try to dampen its influence and help our clients achieve their intended investment ambitions.
Business TV channels, financial publications and online news and opinion outlets exist to inform their audience. But they also exist to make money through the selling of advertising and subscriptions. The result: they must intensify the hubbub of news – regularly adding value through outside experts and viewpoints, but also increasing the general melee of noise as 24/7 schedules must be filled.
Excessive data and soundbites can have a profound effect. The US economist Fischer Black stated in his seminal paper (Noise, 1986), “Noise causes markets to be somewhat inefficient, but often prevents us from taking advantage of inefficiencies.” A surplus of noise can therefore paralyse or cause us to react rather than act. Black believed noise to be the opposite of information.
The Proliferation of Noise is Rising
Noise has amplified many times since his assertions: through the internet, the proliferation of dedicated financial channels and publications and within the echo chambers of social media. Everyone, it seems, wanting to have a meaningful say, all wanting to get their voice heard.
As an example of increased demand (and supply), between 2006 and 2015 revenue doubled for the business-focused channels of CNBC, Fox Business and Bloomberg according to the Pew Research Center in 2016. Yet while there is a great deal of quality to be found in financial reporting there are sensible ways to counteract the impact of noise.
As our Chief Economic Strategist, Gerard Lyons, says, “The outlook depends upon the interaction between fundamentals, policy and confidence, and while all matter, we must not lose sight of the fundamentals.”
Frequently, contagion can spread from one region of the world to another. The trigger, for instance, could be unexpectedly poor economic news such as sluggish GDP figures. But other countries may only suffer a short-term adjustment if their fundamental outlook remains essentially positive.
Equally, a region may receive negative coverage due to political instability, but this may have little effect on a territory’s businesses and their ability to deliver consistent growth. Yet the region’s markets may still suffer in the short term due to excess noise.
The Individual Effects of Noise
While it is wise to be aware of how noise can affect markets and investments, perhaps it is more prudent to cast our gaze inwards. As the economist and professor Benjamin Graham (the mentor of Warren Buffett and champion of value investing) said, “The investor’s chief problem – and even his worst enemy – is likely himself.”
This statement, and Graham’s belief behind it, relates to our temperament and behaviour and how we respond to various factors – such as the din of noise.
Noise can lead us to follow the herd, it can overload us with conflicting information and choices and make us buy or sell investments on impulse.
At Netwealth, our approach is to focus on our core philosophy of investing efficiently, and we work with an understanding that markets can deliver a wide range of potential outcomes. We make investment decisions on a strategic basis, and accept the ripples of interference that so often capture the airwaves.
By being aware of market noise we consciously try to dampen its influence and help our clients achieve their intended investment ambitions.
Please remember that when investing your capital is at risk.
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