17 Feb What does ‘investing through the noise’ actually mean?
By Pieter Hundersmarck
German born Johann Carolus (1575−1634) was the publisher of the world’s first newspaper, with the catchy title of “Relation aller Fürnemmen und gedenckwürdigen Historien” or “account of all distinguished and commemorable news”.
Although we wonder if Carolus would define today’s anxiety-laden diatribe as distinguished or commemorable, the publishing of newsworthy content is big business.
Like any big business, publishing requires funding. This can lead to bias, which requires interpretation. Today’s readers need to be aware of the agenda of their news sources and be wise to the methods publications use to attract your attention.
“Get your facts first, then you can distort them as you please.” – Mark Twain
History is silent about how Carolus funded his publication. However, we would opine it was silent on its founders’ personal faults. Similarly, The Washington Post is likely not the publication to publicly air owner Jeff Bezos’s dirty laundry, or that of his close associates. Editors rarely bite the hand that feeds them.
Newspapers report events through a commercial lens. To generate sales, stories must be reported in a manner that attracts attention and caters to the zeitgeist of its readers. We interpret the world around us based on our global view, and we gravitate to publications that share this view. The Economist is unapologetically liberal, while Breitbart News Network is unapologetically not.
Interpreting content demands that we understand the source. Only when we are armed with the agenda of the writer can the appropriate perspective be applied.
In no segment of the news publishing empire is the range of distorted media incentives clearer than the stock market. Fear and greed play enormous roles, and millions – often billions – of dollars are on the line.
Identifying short-term noise and separating it from signal is critical to long-term investing. Signal is well-researched, substantive information that has a long-term impact on an asset’s value. Signal should be appropriately interpreted, and used to price assets.
Examples of signal are large acquisitions, changing product lines, or societal and demographic changes that affect the addressable market for a company’s product. The introduction of electric cars is undoubtedly a ‘signal’ to account for when investing in the automotive sector.
Noise is everything else. Noise is high frequency, short-term news cycle phenomenon which has little long-term implications beyond the current quarter. Brexit, for example, has had enormous news flow associated with it, much of it noisy. Many of the acts of the Trump presidency have similarly been incredibly noisy, with very little long-term signal.
Signal allows investors to sidestep risk and size their positions appropriately. Noise unfortunately causes many investors to react unwisely and wreak significant damage to their wealth in the process. An investor’s long term success depends on his or her ability to intelligently differentiate between the two.
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