Reduce the noise levels in your investment process
Barry Ritholtz
November 1, 2013



“Signal-to-noise ratio” is an engineering concept that focuses on the amount of useful information being received compared with false or useless data. This is an especially important concept to investors.

Over the past few years, I have been reducing the meaningless distractions in my investing process. You should, too. You want less of the annoying nonsense that interferes with your portfolios and more of the significant data that allow you to become a less distracted, more purposeful investor.

This is a continual process of refinement. Finding moments of quiet contemplation that allow you to think things through is an important aspect of investing. Uninterrupted time with no distractions — no TV or instant messages or tweets — is increasingly rare in our society, and all the more important for that reason. And I don’t mean just quiet time in front of your computer screen — such activities as jogging, yoga, even meditation can get you out of your routine and provide an opening for deep thought.

Daniel J. Boorstin, who served as the librarian of the U.S. Congress, once said that “I write to discover what I think,” and that is my own process. I wake before dawn and sketch out my thoughts on what is happening in the market or the economy. (They show up on my blog). I have found that articulating my perspective in a coherent and structured format is an enormous aid to my understanding. It is more of an editing process, deciding what to remove. Indeed, I spend much of this quiet time deciding what is not worthwhile.

As a professional investor, I find this to be liberating and productive. We are all so distracted by meaningless minutiae. Most of our daily inputs — news, company releases, economic tidbits, punditry — turn out to be distracting irrelevancies that should not affect our investments.

After this editing process, what is left is almost all signal, and no noise.

It is not an easy thing to do. Removing the noise is a fight against habits. Your daily routines are probably filled with noisy and unimportant inputs. But getting to the good stuff buried within that junk is important.

Think about these inputs and what they mean to your investing process. Do they increase or decrease the noise levels?

• News: Most of it is actually old. By the time information hits the papers, it’s pretty much already in the stock price.

• TMI: Too much information can lead to the paradox of overconfidence and bad investment decisions.

• Anecdotes: A good narrative is more compelling than statistical data, but the data are more determinative of future returns.

• Talking heads: Your goal is to safely grow your assets — but what are the goals of those you see on TV? What’s their agenda?

•  Short-term goals: How much of your information consumption is short-term, meaningless noise?

As a thought experiment, consider what would happen if you purposefully tried to assemble a “how-to” list in pursuit of the exact opposite goal we’re talking about here — if you wanted to get much more noise and much less signal? In other words, what are exactly the wrong things to do as an investor?

How to Get More Noise & Less Signal

1 Constantly consume mainstream media. Financial television is an excellent source of actionable investing ideas.

2 Play down data. It’s overrated. Stick with anecdotes from people you know personally and your gut instincts.

3 Pay attention to pundits. They exist for the sole purpose of helping you reach a comfortable retirement.

4 Get the inside dope. All of the important information about the stock market — especially when it is going to crash or rally — is known only to handful of secret insiders. If you can’t get their magic knowledge, blame them for any losses you incur.

5 Stress about this. Exert lots of energy, spend lots of time and create lots of tension about all of the following: Federal Reserve and the Taper, the Dollar versus the Euro, the Tea Party and Congress, Hyper-Inflation, European Sovereign Bank Debt, Gold, China, Deflation, Austerity and the Hindenburg Omen.

6 Don’t do the math. Numbers are vastly overrated, and probability analysis is for geeks anyway.

7 Stay in your comfort zone. Focus only on those news sources that are in sync with your politics. Seek out sources that confirm your preexisting opinions and investment postures. Never read anything that challenges your beliefs.

8 Think fast. Trading is where the big money is made! Don’t worry about the long term — it’s way off in the future. Measure your success in hours and days, not years and decades.

9 Have a Super Happy Fun Time. There is no reason that you cannot also have a good time with your retirement account: It’s tax -deferred, so you have no capital gains consequences. Have fun with it — that’s what it’s there for anyway!

10 Ask: What Have You Done For Me Lately? Never listen to people with good long-term track records who may have had a losing period. When Warren Buffett underperformed in 1999, you should have written him off. Investing is about recent performance!

These guidelines are sarcastic, of course, but I recognize a lot of bad behavior I see all the time from investors. It is a recipe for lots of noise and very little signal.

How much noise do you have in your investing process?


Ritholtz is chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Twitter: @Ritholtz.

Category: Apprenticed Investor, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “Reduce the noise levels in your investment process”

  1. carchamp1 says:

    You’re hitting the nail squarely on the head with this one. I describe this noise as theater.

    Keep it simple. Buy where there’s misery, sell where there’s elation, diversify, and invest for the long term. The people who buy the JCPs, avoid the TWTRs, spread their risk, and remain patient will always win.

    BTW Please tell Josh his blog comments section doesn’t work correctly. I haven’t been able to make a comment since he switched to the new commenting method. Can’t find any way to get him this message.

  2. constantnormal says:

    “stories” have roles, they may open you up to lines of thought or perspectives you had not previously considered, and they may/should alert to to look for confirming/falsifying data that you are not already tracking … but in the absence of anything else, a compelling story is only a story …

  3. Great points, Barry. I no longer subscribe to any publications of any kind. All of my information resources have been reduced to just a few blogs, including this one. This reduction in noise has enabled the ability to listen to my own voice.

    “When the mind is thinking, it is talking to itself.” ~ Plato

  4. faulkner says:

    Early in his excellent book, Investment Management, Robert Hagin notes that “‘what you need to know and why you need to know it’ as well as the equally important corollary ‘what you do not need to know and why you do not need to know it’ – cuts to the heart of the puzzle facing all invetors.” Figure those out and you can cut out a great deal of noise. You are also likely to notice how little you actually know.

    If you dare. Most cannot. Innate human curiousity added items for unconscious (and uncritical) associations. “Maybe that one bit of additional information is what is needed to understand.”

  5. Jamie says:

    1 – 10 describes my habits to a T. They are the reason for every bad decision I’ve made. As much as I try to break free of the noise… I get sucked back in. I can’t seem to shake it…