Posts filed under “Investing”
Reduce the noise levels in your investment process
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?
A few weeks ago, Yale Professor Robert Shiller won the Nobel prize for his work on irrationality and inefficiency of markets. Since then, we have been treated to a plethora of stories on some of his other work — especially so-called CAPE, Shiller’s measure of long term valuation. The general consensus seems to be that…Read More
This issue comes up every few years: Someone is rummaging about in their attic or basement (or less romantically, a safety deposit box), and they find some long forgotten stock certificates.
I first noticed this as an issue with EMC more than a decade ago. A Massachussetts area man found a few certs that had appreciated somewhat:
The man, a 62-year-old salesman who wants to keep his identity under wraps, recently found that some stock he thought he had sold long ago had been quietly gaining value for 13 years. A week ago, it was worth about $4 million. The investor said he bought 3,000 shares of EMC, the data storage company, on a tip from his cousin in 1987, but soon sold 2,000 of them to pay for his children’s college tuition. He forgot about the remaining 1,000 until the state’s Abandoned Property Division, noticing the inactivity, contacted him last month.
Sure enough, after spending three days in his cellar with a kerosene lamp, he found the still-sealed envelope with the stock certificates. The shares, for which he paid about $15.75 each, have split several times, making him the owner of 48,000 shares whose latest 52-week high was $104.94.
-New York Times, December 03, 2000
I was reminded of that story this week when this one showed up in the Guardian:
Man buys $27 of bitcoin, forgets about them, finds they’re now worth $886k
Bought in 2009, currency’s rise in value saw small investment turn into enough to buy an apartment in a wealthy area of Oslo.The meteoric rise in bitcoin has meant that within the space of four years, one Norwegian man’s $27 investment turned into a forgotten $886,000 windfall.
Kristoffer Koch invested 150 kroner ($26.60) in 5,000 bitcoins in 2009, after discovering them during the course of writing a thesis on encryption. He promptly forgot about them until widespread media coverage of the anonymous, decentralised, peer-to-peer digital currency in April 2013 jogged his memory.
These sorts of stories typically are used to extol the virtues of Buy & Hold investing, or Set & Forget portfolios.
Why is this an example of Selection Bias?
I am reminded of the Steely Dan song “Throw Back the Little Ones (and Pan-Fry the Big Ones)”. This method of collecting samples uses outliers — the Big Ones — the wildest and most improbable investing success stories to demonstrate their point. What you do not see are all of the Little Ones, the higher probability, more common versions of the found stock certificate. That narrative usually goes something like “Did you ever here of a company called First Amalgamated Something or Other?” These stories lack the sexiness and Wow! factor of improbably finding a few million dollars in your basement.
Here are the headlines that you did not see — because no one shares this information, and due to the natural selection bias of them:
• Man Finds Worthless Lehman Brothers Stock Certificates in Attic; “I thought I sold these,” he cried
• Man Inherits 10 million shares of now worthless GM Stock; Great Grandfather dies after 10 year coma “If only he went sooner”
• Forgotten AIG shares Almost Worthless; Post Bailout and Reverse Split, boy finds $11 dollars worth of stock; “it was once worth millions” dad laments
Or most likely:
• Forgotten Penny Stock Certificates Still Worthless
I bet for each one of the found millions story, there are 100 worthless unpublished stock cert tales.
Steely Dan song after the jump . . .
click for larger graphic Source: Fidelity I hate whenever the G-word — “Goldilocks” — gets trotted out. Its too complacent, too pat, and it often means we are heading for trouble. That said, I find the chart above quite fascinating. Its from Fidelity, and it suggests we are in the sweet spot for…Read More
S&P 500 (top), NYSE margin debt 12-month ROC (center), & NYSE margin debt (bottom) Source: BofA Merrill Lynch I keep seeing NYSE margin debt showing at record high as somehow a bearish indicator. This may not be supported by the historical data. Merrill’s Stephen Suttmeier points out that, to the contrary, Margin Debt…Read More
Its Friday, the day I like to step back and get all Zen on y’all. As promised yesterday, our subject this morning — indeed, over the past few months — is how to reduce the meaningless distractions in your portfolio (and your life). You want less of the annoying nonsense that interferes with your investing,…Read More
A hedge fund manager friend had mentioned a research report that had noted the Dow, FTSE and Nikkei were at neither all time nor 2013 highs. Those there indices sounded like it a bit of cherry picking to me. So rather than succumb to the usual confirmation bias, I decided to see what major indexes…Read More
click for updated futures Source: Bloomberg Yesterday morning I wrote Look Out Below, I Don’t Know Why Edition. Today, the market half is a mirror image — up about as much as yesterday was down. The only thing that remains the same is my ignorance — I really don’t know why markets are…Read More
Interlude David R. Kotok Cumberland Advisors, October 22, 2013 We have entered an interlude between the last incarnation of the budget, debt, debt-limit, and sequester confrontation and the next incarnation of the budget, debt, debt-limit, and sequester confrontation. Let’s think of this commentary as potpourri following “Done Deal.” Item 1. Katie Darden, editor…Read More