Market Noise: How to Beat it with Temperament

Ulysses and Sirens, Greek mythology, wood engraving, published in 1880

Topic: Investments

Devin Crago CFA

June 25, 2019

Image used with permission: iStock/ZU_09


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Market Noise: How to Beat it with Temperament

In Greek mythology, the beautiful but dangerous Sirens, with their music and voices, lured unsuspecting sailors to disastrous shipwrecks upon rocky shores. This myth is an old example of the risks of distraction.

Today, the drumbeat of distraction seems to have grown louder and more frequent. In our day-to-day lives, this is most apparent in the unrelenting call of our cellphones. We’re all familiar with how it works: your device sends you an alert to prompt you to act (maybe a ping, maybe a buzz), and you check your phone. With any luck, you’re rewarded with a happy rush of dopamine to the brain in response to receiving a friend’s text or an updated sports score. Amazingly, recent data suggest that adults in the U.S. tap, type, swipe and click their phone 2,600 times per day, on average.

The Siren call to action

Investors face an analogous situation of near-constant exposure to stimuli that act as Siren calls to action. The bombardment includes sensationalized news headlines, talking heads on TV and the flashing green and red of stock price movements on the screen. Each of these stimuli can provoke an irresistible urge to take action – i.e., do something!

In the field of behavioural finance, this tendency is known as action bias. As the term implies, many people believe that only by taking some kind of action can they create value.

The rocky shores

But here’s the problem: bias towards action can lead to several bad outcomes in investing.

A common mistake occurs when the bias towards action leads investors to attempt to time the market. In a period of rising markets, the action bias urges you to get on board before it’s too late: Buy! If markets are declining, the bias urges you to stop the bleeding: Sell! If this action mindset leads to repeated attempts to time the markets, and ultimately a series of wrong-headed “buy-high, sell-low decisions,” the investment results can be disastrous.

Another pitfall is to be lured into near-term speculation rather than long-term investing. If an investor chooses to emphasize action before all else, this tends to lead to a reckless “Ready! Fire! Aim!” investment process. While all investors must make decisions with imperfect and incomplete information, it’s seldom a winning strategy to cast aside rational long-term thinking in order to make speculative investment decisions based on the unrelenting torrent of daily market noise.

Blocking out the noise with temperament

At Nexus, our investment approach is purposefully oriented towards the long term to help us avoid the urge to respond to each and every near-term stimulus. An important aspect of our approach boils down to the temperament of our team. We take our cue on this subject from Warren Buffett, who noted the following: “Temperament is more important than IQ. You need reasonable intelligence, but you absolutely have to have the right temperament.”

Although it takes all kinds of people to make the investment world go around, it’s our view that a predisposition to the following character traits is advantageous:

  1. Self-control: The successful investor doesn’t pursue action for its own sake. Rather than succumb to the urge to do something, the wiser investor often exercises restraint. In the words of the renowned American investor Howard Marks: “There aren’t always great things to do, and sometimes we maximize our contribution by being discerning and relatively inactive. Patient opportunism – waiting for bargains – is often your best strategy.”(1) What’s more, avoiding hyperactivity has the added benefit of potentially reducing trading costs and taxes – both important factors in determining returns.
  2. Commitment: Our experience is that investors who have a plan and stick to it achieve superior outcomes. Commitment to both a personalized financial plan and a core investment philosophy is critical.
  3. Emotional fortitude: The ability to withstand the emotional turmoil that comes with market volatility is crucial. In stressful times, an investor can be tempted to stray from the path, so they require more emotional resiliency than most to remain committed to their plan.

In Homer’s Odyssey, the sailors resisted the Sirens’ song by plugging their ears with beeswax. Odysseus himself opted to be bound to the ship’s mast. We don’t recommend either as a practical solution to counter market distractions. Instead, simply be aware of your temperament and the role it can play in carrying you safely through your investment journey.

(1) The Most Important Thing, Howard Marks, 2011.

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