Mr. Informato woke up at the sound of his super-technological alarm. It is around 5 a.m. the market news pour into his sleep-deprived mind. After snatching barely four hours of sleep, he is ready to take off. Mr. Informato wears his new smart-watch on the wrist, Bluetooth earphones, and tech glasses that keep him constantly updated.
He knows every single move of the market. He feels he knows Wall Street better than his wife. In fact, he is thinking of divorcing to dedicate all his time to that. He is a successful portfolio manager. Ever since he joined Fortunata Inc., the company’s profits have skyrocketed.
That morning though something seems not to work as usual. Most of the investments he had made turned out to be too risky. The accumulated profits of the last years were burned in less than one hour! What happened? Was it a conspiracy against Mr. Informato? Not at all.
99.5% of the News Is Noise
As the author of Antifragile puts it:
The more frequently you look at data, the more noise you are disproportionally likely to get (rather than the valuable part called the signal); hence the higher the noise to signal ratio.
and he goes on:
Assume further that for what you are observing, at the yearly frequency the ratio of signal to noise is about one to one (say half noise, half signal) —it means that about half of changes are real improvements or degradations, the other half comes from randomness.
This ratio is what you get from yearly observations. But if you look at the very same data on a daily basis, the composition would change to 95% noise, 5% signal. And if you observe data on an hourly basis, as people immersed in the news and markets price variations do, the split becomes 99.5% noise to .5% signal.
That is two hundred times more noise than signal —which is why anyone who listens to news (except when very, very significant events take place) is one step below sucker.
In other words, the false sense of knowledge and understanding that comes from the news is just an illusion. Therefore, if you spend most of your time reading the daily/hourly market news, you may not only be wasting your time but also limiting your understanding of financial markets!
To read the full post from Taleb, click here.
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