Insightful articles on the world of finance and investing

12 Dec 2018
Financial Noise – what it is, and how to avoid it!

Dimensional’s Jim Parker spent over 20 years as a leading New Zealand and Australian financial journalist before entering the financial world, so he is ideally placed to comment on the current state of the media, and financial reporting in particular.

Jim was our guest presenter at our recent annual client briefing, so we took the opportunity to ask him a few questions.

First off Jim, why is there so much ‘noise’ now?
Obviously there has been an explosion of mobile devices, which has sent traditional old media into disarray. There are now no gatekeepers and very little trust, as people are constantly being bombarded by ‘fake news’ via social media. 

You use the term ‘churnalism’– what does that mean?
The media business model as we knew it is busted and news is now a free commodity.  This has led to shrinking resources and tighter deadlines, and ‘clicks’ determine news value, so opinion trumps analysis.  All this means there is now no agreed ‘truth’.

So what are the consequences for Investors?
Noise encourages investors to see patterns that don’t exist and create panic about news that’s already priced into investment markets.  The risk when investors act on market and economic forecasts is that you buy on greed and sell on fear.  My chart showing media quotes against actual sharemarket growth spells out very clearly the danger of this.

 So what do you recommend?

My ten-step plan to filter out noise is:

  1. Understand your role in the attention economy – your eyeballs are being sold to advertisers
  2. Accept how markets work – news is about the past and new information is quickly built into prices
  3. Beware the narrative fallacy – the tendency of news reports to link the cause of the day’s share price movements to a topical but otherwise unrelated event
  4. Check last year’s forecasts
  5. Beware the offer of the quick fix
  6. Compare & contrast coverage from different sources
  7. Be selective of the news you read and remain skeptical
  8. Distrust the new and shiny
  9. Ignore, tune out, turn off
  10. Work on what you can control