Staying systematic (signal versus noise)

If you fail to plan…

Systematic investing is one of our 4 thought principles which form part of our broader investment philosophy and part of our 8 timeless principles for generating wealth from stock market investing. 

We believe utilising a systematic approach will be more successful than any other method is generating wealth from investing in the stock market.

We’ve often said if you don’t have a systematic approach then you will likely suffer from making decisions based on emotions rather than any structured, logical, or systematic approach.

And we know from results that automated buying and selling algorithms are often more successful than humans in stock market investing.

The reason is quite simple: machines are cold-blooded and so they don’t let subjective opinions and emotions get in the way of making decisions based on history and future probabilities. 

As we also discuss often, it’s important to focus on your timeframe when investing.

This doesn’t mean you simply buy and hold; but it does mean keeping the long term in the forefront of your mind when markets start to get rocky and experience high volatility.

Daily market noise

It’s difficult to remain focused on the long term when there’s a running daily commentary surrounding stock market movement.

In most cases all this is speculation about what made the stock market rise or fall on any one day. 

Let’s start at the top. 

The job of a market commentator such as an economist or fund manager is not only to report the facts.

Their job, as with many of us, is to generate business and profits for their respective employers.

So bear this in mind when you are listening to an interpretation of daily, weekly, or monthly stock market movement. 

Remember, economists, financial advisers and fund managers are rewarded not just on understanding markets, but also operate as PR and marketing folks for their respective companies. 

Next in line are financial journalists whose job is to report the day’s events.

Now they must file at least one (and these days often more than one) story each day about what’s happening in the markets.

Thus the morning’s headline may state the Australian market set to open higher because of [insert reason here].

But if the market falls in the next few hours, it’s not unusual for journalists to turn around and draft a new story stating a completely different reason for the market’s decline.

However, in order to state what the reason is, you really need to do some research to confirm or deny several reasons.

Most journalists find this difficult to do given media deadlines and the need to get their story out there first. 

The poor journalist files the report and hopes that it is roughly in line with what others are saying is the reason for the market’s movements.

Remember, the job of the media is not to report the facts but to get more people to click on the article.

That’s just the way they earn their keep.  

Focus on the signal

Many fund managers tell you to think long term, buy and hold stocks but then turn around and make daily commentary and talk about market ‘action’.

But if you invest for the long term – or more accurately over the long term – then daily commentary is of little practical use.

What you see in the short term daily movements (unless you are a day trader) is simply variance – meaning the daily movements of prices – and in many cases this doesn’t give you any useful information if you are focused on long term result. 

Most of the daily commentary, then, is ‘noise’.

And what we want in order to invest successfully is the signal.

Daily noise really tells you nothing about the long term, but that doesn’t mean it’s totally useless.

Because eventually all the daily noise adds up to a signal.

Genuine signals in the stock market are rare.

For example, you can use long term valuation measures such as the one we recommend, the Cyclically Adjusted Price Earnings Ratio (CAPE Ratio) which we discuss in depth in our book Low Rates High Returns.

Make sure, then, that what you are seeing, hearing etc. is a signal not noise. 

This focus on the signal can help you avoid the daily short-term noise which can see you weaken and break with your systematic approach. 

Turning down the noise

We know it’s hard for each of us to ignore the noise, but as you become a more experienced investor you become somewhat fortified against the day-to-day noise and can stick to your systematic approach. 

One way to cope if you are relatively new to investing is to avoid looking at the market daily and check balances, say, at the end of each month (or quarterly according to your plan or systematic approach). 

That way you can simply study your portfolio relatively unaffected by the daily market commentary.

If you use a systematic approach incorporating our 8 timeless principles (with a focus on your asset allocation and rebalancing) then you should be able to avoid breaking out of your system.

Every successful investor has a framework or system, because without it you are at the mercy of the daily noise and your emotional reactions to those temporary events.

Make sure you maintain your discipline and it will keep assisting you in building wealth over the long term.

To find out more about our coaching program see here.

Published by petewargent

CEO Next Level Wealth, & AllenWargent Property Buyers, with offices in Sydney, Brisbane, & London. Leading Australian market analyst, & 6-time published finance author. For more see: Qualifications including: B.A. (Hons.) Industrial History, Chartered Accountant (FCA), Diploma Financial Services (Financial Planning), Chartered Secretary, Advanced Diploma Applied Corporate Governance.

%d bloggers like this: