Why too much noise can seriously impair investment decisions
Equity investors need information to make investment decisions, otherwise, no analysis of any kind would be possible. Without any information on a company, a decision to buy or sell would be a complete and total gamble.
But what information do investors need? "The more the better" is a knee-jerk reaction to this question, yet caution us needed if adopting that approach. It pays to remember that Warren Buffett, during the '50s and '60s, went about creating a multibillion-dollar empire from his desk in downtown Omaha, Nebraska. And all he had on that desk were stacks of company annual reports, a Cherry Coca-Cola, a pen, a pad, and a phone he rarely used.
Buffett had no computer, no television, no Bloomberg or Reuters terminal, no direct market access, and no hotline to a broker. Not even anyone else in his office. Nearly virtual silence, the only noise being the rustle of annual report pages being turned and the occasional slurp of Cherry Coca-Cola. In that near silence, Buffett made investment decisions that put him on track to become one of the world’s richest people from a near-zero dollar starting position.
The trick Warren had learned, in large part from his mentor Benjamin Graham, was to go to the effort of either approaching companies for copies of their old annual reports or petition the SEC for a copy of an annual report that had been filed with them. That was the vital information he needed to invest but there was just no way to download a copy from a company website in 1956 when Warren started his first private partnership. And indeed, it was still like that as the seventies rolled in.
Even recently, I was trying to review the 1973 annual report for Coca-Cola NYSE: KO as part of a study I was doing. That annual report is still not available on the Coca-Cola website even now, the only option is to buy a full original copy on eBay but that will typically cost around $100.
Looking back now, you can understand why Warren enjoyed a bonanza in those early years. He was expertly analysing difficult-to-access information that few others were looking at, never mind trying to analyse.
At that time most of his peer’s investment decisions were more informed by share price moves. Because at that time, share prices were the most readily available and timely information that investors could access. This is almost certainly the inspiration behind one of Warren’s most famous quotes, “Price is what you pay, value is what you get”.
Jumping forward six decades to 2022, you’d guess that all investors are following the example set by one of the most successful investors of any generation. That investors would only be interested in information on companies that were either in their annual report or would be in their next annual report.
The problem is that because of the world wide web, investors now have ready access to enormous amounts of information that would have been unimaginable back in 1956. And the temptation to access and try and use that mountain of information is overwhelming for most investors. These days, even flippant tweets by Elon Musk are considered information worthy of being the basis for an investment decision. The noise is at times deafening.
Take for example this recent screen shot of CNBC covering the US share market. It’s clearly very noisy. The bottom of the screen is filled with Chyrons.
Chyrons are the term for the information scrolling along the bottom third of the screen. It’s named after Chyron Corporation, the company that first developed the software that allowed producers to have graphics rolling along the bottom portion of the screen. That information scrolling along the bottom is nothing that Warren Buffett would have recommended as remotely useful for investors to be aware of. It is invariably just the last traded price of an index, share, bond, currency, commodity and now even Bitcoin, whatever that is.
But it’s gone way beyond just simple Chyrons. There are already nine distinct and separate sources of information on this screen snapshot. And remember, this is continuously scrolling, so if an investor sits and watches this circus for just half an hour, they will have been bombarded with thousands of little fragments of irrelevant information. It’s next-level noise.
This particular CNBC broadcast already has a cult following. As described, with all the data struggling to get investors attention it was already a very noisy screen, but then the lady being interviewed on Zoom had a ring at her front door. There followed a decent cacophony of her dogs barking in the background. To give her credit she didn’t flinch and carried on regardless. Unfortunately, her partner decided to help and silence the hounds, however, that led to him walking behind her dressed only in his boxers. It’s amazing in some ways that anyone noticed with all the talk and prices and confusion that was already happening on screen.
On a more serious note, this has been a wildly volatile year for share markets. A deal of this is likely to be from the noise that investors are drawn to. At the heart of that noise are Chyrons that feed endless price movements to market watchers. Even decades after that information was proven to be the wrong information to base investment decisions upon, price movements are still the main noise in town. This year has seen that price noise roaring in investors' ears, and during a sharp market sell-off that noise encourages investors to act, and that act is invariably to sell. And that selling creates more noise and then more selling occurs.
It shouldn’t be a surprise that Berkshire Hathaway was a net buyer of shares in the June quarter, the first time since early 2020. Because as Buffett still knows and investors should know, it’s the information in annual reports that ultimately makes the difference between a good investment and a bad one. Not the last price traded.
The cycle of noise and selling dislocates share prices from fundamentals, creating an overreaction on the downside. It may not seem it at the time, but that overreaction creates an opportunity to buy cheap shares.
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Stephen has over 25 yrs investment experience & co-founded Castle Point, a NZ boutique fund manager, in 2013. Prior to that he worked at funds management companies in Auckland, London & Edinburgh. Castle Point WINNER FundSource Boutique Manager 2019