Never Mind The Noise

Investors are all too often distracted by noise in markets. "Noise" is actually an statistical term to describe "unexplained variability in a data sample". Yet Wall Street gurus are ready and willing to offer explanations ad nauseam. Our wise colleague Harvey Seigel, offers his take...  

“The stock market is in its third longest stretch without a new high since 2013”.

“Just as one day some primitive tribesman scratched his nose, saw rain falling, and developed an elaborate method of scratching his nose to bring on the much-needed rain, we link economic prosperity to some rate cut by the Federal Reserve Board, or the success of a company with the appointment of the new president “at the helm”.
Nassim Nicholas Taleb
Fooled By Randomness


The MarketWatch article mentioned above goes on to quote a handful of market pundits who make conjectures on the significance of the befuddling statistic noted in its headline. Taleb, better known as the author of “The Black Swan: The Impact of the Highly Probable”, continues to write on randomness, probability and uncertainty.

Markets paid no attention to either; while stocks gained early in 2018 by February 8th the S&P 500 Index had declined by 10% from a high reached in January.

Wall Street calls a drop like this a “correction”. We call it an opportunity for audience-seeking media to grossly over simplify complex issues. Market indices have no memory; they are constructs of financial service firms that are used to track security prices. Markets don’t know where they’ve been or where they’re going. What they do is go up until they don’t and then they decline. Leave it to Wall Street to assign a name that implies bad behavior, punishment (correction) followed by smooth sailing ahead.

Well, maybe – but what matters to investors is that, over time, the ups best the downs and compound to a positive rate of return – and, so far so good.