Tag Archives: signal and noise

The Signal and The Noise (Part 2)

How can we tell what’s really happening?

Great Circus Parade, Milwaukee, WI. Photo: Royal Broil. Source: Wikipedia

When the newsreels stop rolling and the microphones go away, we’re sometimes left with the impression that a circus parade just rolled by. Did anything actually change, or did we just see a cavalcade of horses, camels, and clowns roll down Main Street? We’ve heard about news stories with an underlying agenda too many times.

When we read any important news item, something that always changes is our perception of the news. Our perceptions meld together into expectations, and those expectations get built into stock and bond prices. It doesn’t happen perfectly and it doesn’t happen all at once, but market prices then reflect the general news stream.

That’s why everyone was so downcast last winter. Several Fed Governors gave speeches where they said that the Fed planned to raise rates four times in 2016. That got investors scared: was the Fed “behind the curve”? By contrast, the sky-high sentiment we’ve seen lately among the software giants mirrors the expectation people have today that software will eat the world.

Market trends then tend to get overdone. Feelings investors have reinforce and feed on themselves. Black days or sunny skies look like they will stretch on forever. But they never do. We look back at those times and ask ourselves, “What were we thinking?”

It’s a fair question. Because when everyone thinks alike, everyone is likely to be wrong.

Douglas R. Tengdin, CFA

The Signal and the Noise (Part 1)

How can we concentrate on what matters?

Radio frequency doubler. Source: Wikipedia

Between Twitter and newspapers and talking-heads and junk mail proclaiming the next turn in the market, what’s a long-term investor to do? How can we stay focused on what we need to know without being distracted by all the noise?

The first step is to understand that most of what’s on the airwaves is static—background verbal clutter of no more consequence than elevator music. The real news that matters for your investing is the news you already know: you just had a child and need to start a college fund; you just turned 50 and can increase your retirement savings contributions; elderly parents needs to arrange their finances to reduce taxes.

Our most significant investment decisions should be driven by our life circumstances. And while those don’t usually make the 10 o’clock news, they’re what we need to concentrate on when we allocate assets, think about investment styles, and even pick stocks and bonds. An effective investment policy starts with the investor – their needs, constraints, resources, and personal concerns. This is what strategic investing is all about: strategies that are tailored to our personal needs.

Sunday morning talk shows may be important for public policy, but our evening kitchen-table-talk is what matters most for our investment policy.

Douglas R. Tengdin, CFA

Signals and Noise (Part 1)

How do we stay focused?

With all the tweets and blogs and talking-heads and junk mail proclaiming the next new era or the turn in the market, what is an investor to do? How can we stay tuned in to the market without being distracted by all the noise?

The first step is to understand that most of what’s on the airwaves is static—background verbal clutter of no more consequence than elevator music. The real news that matters for your investing is news you already know: you just had a child and need to start a college fund; you just turned 50 and can increase your retirement savings contributions; an elderly parent needs to arrange finances to reduce taxes.

The most significant investment decisions are driven by life circumstances. And while those don’t usually make the 10 o’clock news, they’re what we need to concentrate on when we allocate assets, think about investment styles, and even pick stocks and bonds. An effective investment policy starts with the investor.

Sunday morning talk shows may be important for public policy, but your evening kitchen-table talk is what matters most to your investment policy.

Douglas R. Tengdin, CFA

Chief Investment Officer