In the digital age and the era of the 24-hour news cycle, advisers are bombarded with information and data. This “noise” is the adviser’s natural enemy, but without a disciplined approach to staying focused on what’s important it’s impossible to make sound long-term investment decisions for clients, according to Paul Taylor, portfolio manager for the Fidelity Australian Equities Fund.
“Chatter, babble, pointless movement and sound – noise is something that is out of place. It’s unwanted; it’s irritating; it’s distracting,” Taylor says.
“If you’re a musician, noise is sound that’s all mixed up and in a state of confusion. If you’re a scientist, noise masks signals; and in the markets, noise is the unimportant. So if noise is so negative, why do we invite it into our lives? Why is it part of our investment decisions?”
If investors are not diligent and disciplined, they run the risk of being captured by noise, Taylor says.
“It distracts us from our goals,” Taylor says.
“Noise hides important ideas and concepts, and destroys patterns, rhythms and tunes. But the really dangerous thing about noise is that it’s interesting. Noise is life. It’s activity; it’s vibrancy; it’s excitement.
“Noise is interesting, but it’s not important. It’s enticing, intoxicating seductive. Noise is the shiny bauble or trinket that captures our gaze.”
Taylor says to help stay focused on what’s useful, he has developed the “five principles of noise”.
Five principles of noise
“And those five principles are: important versus unimportant; facts versus emotions; long-term versus short-term; simple versus complex; and proactive versus reactive,” he says.
“Noise is unimportant, emotional, short-term, complex and reactive,” he says.
“To eliminate noise you need to be focused on the important, the facts, the long term, the simple – and on being proactive.”
It’s more important now than ever to be able to shut out the noise, and arguably more difficult than ever, Taylor says. He says that research has found a massive increase in the amount of information we’re exposed to, and that we generate ourselves. The University of Southern California estimates that in 1986 each American consumed the equivalent of about 40 newspapers of information per day. On top of that, they produced about two pages of a newspaper, every day.
“At that time it was basically through the telephone, through the post and by fax,” Taylor says.
“By 2007, they found that Americans were now consuming the equivalent of 174 newspapers in information, and were putting out about six newspapers in information content. That growth was because of email, digital photography and social networks.
“That’s something like 200 times growth in information that is being consumed and put out into the market.”
The person you want to be
Taylor says noise “stops you from doing the things you want to do, or even being the person you want to be, or creating the business the you want to be involved in”.
“Noise is interesting, but it’s not important,” he says. As an investor, it distracts him from “understanding how companies make money, and it tries to derail the investment process”.
“Like most things in life, the principles around noise are actually quit simple,” he says.
“You want to focus on things that are important. You want to encourage the facts and the brutal truth. You want to see what patterns develop when you view for the long term. You want to keep it simple, and you want to be proactive.
“You want to eliminate noise and seek the fundamental truths.”
Paul Taylor’s Guide To Seeking The Fundamental Truth
1. Institutionalise the process.
“We get out and meet the market every quarter, whether a company is in favour or out of favour or somewhere in between, we’re meeting with them,” Taylor says. “We just systematically work our way through the market – 200 companies every quarter. When you do that, you’re not necessarily chasing hot sectors, or avoiding out-of-favour sectors…you’re actually completely eliminating noise from that process.”
2. Maintain 30-stock coverage.
“The next one is to make sure we still have reasonable coverage at an individual analyst level,” Taylor says. “There’s a number of stocks covered per analyst. There’s a real benefit in going down from 100 or 50 down to 30; but as you get below 30, there starts to be negative issues coming in – if you take it to an extreme and say analysts should only cover one or two stocks, they’ve got time to get involved in things that are interesting, but not important. That’s the actual definition of noise.”
3. Autopsies without blame.
“It really is quite an important process to go back and look at why a stock hasn’t worked or why a stock has worked,” Taylor says. “The more you can do that without emotion and without blame, the more you’ll learn the real facts behind it. The more, also I think, people are very generous. In a team meeting if we’re discussing a stock and there’s no blame and no emotion, I think people are a lot more generous in discussing what they thing went wrong, and other people can learn from those mistakes as well.”
4. Focus on the important.
“One of the key things on this for me is voicemail,” Taylor says. “As an analyst…you’ll meet a company, and then within the next 24 hours you send out a voicemail to other analysts and portfolio managers right around the world, telling them the information from that meeting, the relevant facts, and the conclusions. That has to be a really sharp voicemail – that has to be a 60-second voicemail. As analyst I found there was real power in thinking about that 60-second voicemail and writing that 60-second voicemail down. You can’t get into interesting-but-not-important.”
5. Turn off the screens.
“This is a great one,” Taylor says. “If I’ve had a day that I’ve been sitting in the office just looking at my screen watching stocks go up and down, I have learned absolutely nothing at the end of the day. All I feel is knocked around by the market. If I’ve had a day out meeting companies, I feel great at the end of the day. I’ve learned a lot; I’ve got to understand how companies make money; I’ve got to understand management teams; I feel fantastic at the end of the day even if markets have bounced around all over the place. I’ve added to my knowledge. That’s very much an example or reactive versus proactive.”
6. Focus on the company meeting.
“This is the heart of our investment process,” Taylor says.
7. Visit companies at their office/time out of market.
“To get rid of the noise, you’ve got to step out of your daily life and your daily routines and you need to talk to companies in their home environment,” Taylor says.
8. Don’t continually check performance.
“This would be the number one mistake of junior portfolio managers – and it’s a tough one to get over,” Taylor says. “Same as the screens – if you’re continually checking performance, that’s acting on you, especially if things are going badly. Human nature is such that when things are going badly we feel we’ve got to do something. And if performance is going against you…you’ll feel that you’ve got to do something…and sometimes that’s almost at the worst possible time – it’s telling you to do something when the best action will be to do nothing.”
