There is a vast amount of economic and financial data that is released every trading day, and the schedule for these releases stretches out into infinity. The sheer quantity of it all makes it a problem to deal with. That’s one reason that releases are a source of noise.
Some releases are important, others are not. Some of the new data will move prices, some of it won’t. And for a lot of the time, you won’t know which will and which won’t. That’s another reason that releases are a source of noise.
It’s a mistake to equate noise with irrelevance, something that can be easily dismissed with a wave of your hand. Data releases give you an update on what’s happening in the financial world, and so it would be a bad idea to simply try to ignore them because they are noisy. But it would also be a mistake to allow yourself to be overwhelmed by trying to ingest the entirety of this unstoppable tide.
This means that, at the most superficial level, a way to deal with this source of noise is to decide which releases are important to you. So far, so obvious. When you make this decision it should naturally be a function of what is required for your investment process, and your process should be built around whatever you consider to be your competitive advantage. This also seems obvious, but it is put into action by surprisingly few fund-management firms.
There was a myth amongst the early sailors that beyond the mapped parts of the oceans lay great terror, either the edge of the world or ship-destroying monsters. Modern fund managers labour under an inversion of this myth, that beyond the choppiness and anxiety surrounding this week’s releases lies calm water that will be easy to navigate. This sort of guff gets said in the media and repeated in way too many morning meetings. A part of you knows this to be utter nonsense, because there is a perpetual conveyor belt of releases and announcements that’s never going to stop and you will never receive the all-clear signal. Another part of you, hopefully a small part, that buys the myth opts you into a perpetual state of hyperventilation and distraction. That’s not good.
Yeah, you may say, but what about really important numbers, like the US federal funds rate? You may have an edge in making better predictions than your competitors about the next move by the Federal Reserve, and if you do, you should build that edge into your process. But, perhaps unkindly, I doubt that you have such an edge, which means that you probably allocate too much of your scarce resources to this one piece of data. This is probably the most watched and analysed release in the financial world because it is so important, and that very fact makes it an extremely unlikely place to find alpha.
If you don’t have a first-order advantage in predicting the Fed’s moves, perhaps you have an advantage in capturing the second-order consequences of the FOMC decisions, perhaps the ability to construct a clever position to exploit possible shocks. Good for you if you do, you should build that into your process. But only if there is a decent chance that you have some edge.
This is the point: the Fed funds rate is a very important macro variable but, other than knowing where it is now and what the consensus forecast is (which you can do with about three keystrokes and which will take you less than 10 seconds), you should apply your mind elsewhere. If you spend any more time on it, then it is a source of noise because it is interfering with the difficult business of finding opportunities where you might actually have an edge. This one release is incredibly important, but you should give it very little of your time. This is a paradox.
That’s just one of the many releases that you might keep an eye on, but the principle applies to all of the others. If you believe that you have better than average insight into the reasons that the market is wrong, then you are expressing a view on where your edge lies. You should certainly apply your resources to taking advantage of areas where you have some informational or analytical or behavioural advantage.
To streamline your information-flow, a good place to start is with a review of your competitive advantages. Then you can rely on consensus for everything other than the area where you have an edge. That’s how you will win in this game. If you get that the wrong way around, you’ll be striving for mediocrity.
- Where do you believe you have competitive advantages?
- How is that reflected in your investment process?
- How is that reflected in your day-to-day dealing with data flow?
On the topic of having informational edge, do you think it can be argued that a manager’s edge can be filtering and weighing the information better than peers? 50 years ago the informational edge was probably having the best funnel, now it’s having the best filter. Distilling the signal from the noise, rather than having unique insights or information.
Ruan, thanks for your insightful question. I like your distinction between funnel and filter.
My view is that managers can and do gain a competitive advantage by creating superior filters, by being able to distinguish signal from noise. However, some managers, in their valiant attempt not to be swamped by noise, fall into the trap of calibrating their filters in such a way that they unwittingly create an echo chamber. These managers feel soothed by hearing their views reflected back to them by others, and they mistake high quality analysis and commentary for what they already think. In this way an ineffective filter can transmute manifest noise into more dangerous latent noise, and these managers will be highly vulnerable to surprises.
Creating effective filters to deal with noise is a difficult task, and because it is, it offers a few managers the opportunity to gain an edge. I also think it’s important not to simply see a filter as something that falls only into the tech-domain, like something that a clever algorithm does (although this is part of the whole picture). It is also something that falls into the intra-personal domain (how you manage your physical, emotional and cognitive processes) and the interpersonal domain (how you manage your professional and private relationships). Said another way, I think noise management is both a hard skill and a soft skill.