It’s Impossible to Ignore the Noise

Just ignore the noise!

Many financial advisors have said these words over the years. When you get your CFP they give you statements like this. Sounds like good advice.

But there is a difference between good advice and effective advice. There’s a lot of good advice everywhere you look these days, but many people ignore it because it’s not easy to follow.

good advice preaches to your customers to stay the course.

Effective advice creates portfolios that are resilient and behaviorally aware enough to help clients stick to their plans.

good advice is to ignore the noise.

Effective advice Creating a comprehensive investment plan that focuses on the things that are within your control.

It’s nearly impossible to ignore the noise today because you have a rectangular supercomputer in your hands that constantly overwhelms you with news, alerts, and social media posts all day long.

Of course, in some ways markets need noise to function. Fisher Black wrote in his aptly titled research paper: Noisy, In 1986:

The effects of noise on the world and our worldview are profound. Noise, in the sense of a large number of small events, is generally a much stronger causal factor than a small number of large events. Noise makes it possible to trade in financial markets and therefore allows us to observe the prices of financial assets. Noise causes markets to be inefficient in some way, but it often prevents us from taking advantage of inefficiencies. Noise in the form of uncertainty about future tastes and technology by sector causes business cycles and makes them highly resistant to improvement through government intervention.

Noise makes financial markets possible, but it also makes them imperfect.

The noise never goes away, what should you do about it?

In my opinion, there are two ways to deal with the noise whirlwind in the information age:

(1) You learn to live with it.

(2) You keep yourself busy with other things.

Inside The Power of Habit, Charles Duhigg tells the story of the trajectory of Tony Dungy’s NFL coaching career. Dungy was constantly passed up for head coaching jobs early in his career because many organizations thought his philosophy was too simplistic.

Dungy kept things deliberately simple.

He wanted his players to follow a repeatable process so they didn’t have to make too many small decisions during the game. The problem arose when players ignored the process and followed their instincts:

“We were training, everything was coming together, then we had a big game and it was like the training disappeared,” Dungy told me. “Afterwards my players said, ‘It was a critical play and I went back to what I knew’ or ‘I felt like I had to step it up.’ what were they Really “Most of the time they said they had confidence in our system, but when everything was at risk, that faith was shattered.”

What eventually appealed to players on both the Bucs and Colts (where they won the Super Bowl) was the idea that you have to believe in your system all the time, not just when you want to. Your brain only has a limited amount of willpower, so creating good habits that become second nature can help you avoid overreacting.

At the other end of the spectrum, some people just live their lives and ignore the noise.

I met with a client this week. I had a full market update with charts on oil, geopolitical risks, etc. to put the current environment into perspective.

I then asked the customer what they thought about the situation.

I didn’t really pay attention. There are so many other things going on in my life and work right now.

This was music to my ears.

In his poetry, Learning a little, Alexander Pope once wrote:

A little learning is a dangerous thing;
Drink deeply or taste the Pierian spring:
There shallow air currents intoxicate the brain,
And drinking alcohol greatly sobers us up.

The worst place you can be is stuck in the middle ground between deep understanding and blissful ignorance.

Michael and I talk about all the noise going on in the markets in this week’s Animal Spirits video:



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Further Reading:
Preparing Without Guessing

Now here’s what I’ve been reading lately:

Books: