Sunday, November 26, 2017

Before Happiness #4 : Increase Signal to Noise Ratio

Ok, managed to squeeze in some time to post on this blog. Exam preps are really insane this week.

This section of the book is the hardest to achieve for me because I take on a lot of information sources and, combining my blogging hobby with my legal career switch, I am almost always swamped with information or crazy ideas.

a) Identify the signal from the noise

Noise is unusable, untimely, hypothetical and distracting. I consider The Independent a website dedicated to noise. 

Otherwise, I struggle with this section a lot because the book explicitly says that a lot of financial predictions are noise and Jim Cramer was even singled out as one of those information sources that an investor  better off without. The more important differentiator between the signal and noise in investing is that, for me, I am more interested in the working than the answer. I read a lot of broker reports and what is important is the reason why someone is recommending whether we buy or sell. 

As I have been generally profitable after reading these reports, I doubt they can be classified as noise. Macro-economic predictions are also hardly noise since the justification of the predictions make interesting reading and highlight important trends investors can follow. 

For non-investors, I think if you tune out the motivational bullshit that always say that you will succeed if you put your mind to it, it should save enough bandwidth for you to really figure out techniques to help you achieve you goals. 

b) Reduce noise by 5%

Once you identify the signal from the noise, you can reduce the noise by 5%. This comes from reducing the intake of TV and Radio. On the internet, installing an Ad Blocker will also help. If you are me and rely on an RSS feed, maybe you may want to trim the blogs that you are subscribed too. 

The author has also managed to convince me to start considering the purchase of Bose noise cancelling head phones. 

The hardest part about making this work is the fear of missing out. I subscribe to almost every financial blogger because I am so worried about losing out on a great investment idea. 

But these days, I just read the headlines and then decide if it can improve my bottomline. 

Otherwise I move on.

c) Eliminate pessimism

This last idea is very useful and I urge you guys to try it. Pessimism is something that we've adapted in our brains due to millions of years of evolution but too much of it can prevent you from achieving greatness. You can reduce it my adopting the following three maxims :

a) Keep your worries in proportion of the likelihood of the event.
b) Don't deny yourself 10,000 good days just to be right a few times when the days turn bad.
c) Worrying should not be equated to being loving or responsible. 

I think there is too much pessimism after my talk about leverage but if you were a PAYING CUSTOMER, you will know that I advocate responsible leverage with a view of always being aware that there is a chance you can go completely bust. ( In fact, I even show my working to everyone. )

But if the projected chance of going bust is going to be less than 2.5% and the extent of the bust is capped at 60% of the margin account, I doubt it's rational to refuse leverage at all considering that I already limit the margin account to below 20% of my total net worth. 

Of course, markets being hardly normal, critics may one day be right, but I will not ruin the possibility of many good years ahead just to feel smug when there is a rare market collapse. 

Maybe by then, I may have already pre-paid my mortgage and no longer have a margin account.

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