Market Noise

A test of temperament

Have you changed your views in the last two weeks? Are you more or less confident in what you previously believed?

Price action is a powerful force; it can reinforce beliefs (confirmation bias) or leave you badly shaken. We know that short term price action can be little more than random but that isn’t much help when we see charts like this.

Slide1

It is hard for human beings to take. Something must be causing it, so we look to experts, many of whom ‘successfully called the crash of 2008’ or ‘have run $x trillion for over 20 years.’ Many will speak very convincingly and credibly in the media.

As things go against us, views that we may have dismissed when things were going our way, suddenly cause a sinking sensation in the stomach. We ask ourselves: ‘am I sure that all this money printing will/won’t end in tears?’ ‘Should I continue to use/ignore the Shiller P/E ratio?’ ‘Do I really think this low growth is cyclical/structural?’

What’s more we are bombarded by noise, a quick Google search gives us this:

Slide2

Ouch.

When prices go against you, it can feel very lonely. Neuroscientists have shown that the pain of social exclusion is felt in the same part of the brain as a broken arm. If you are managing money for others, this is magnified hugely. And then you have to justify to your risk department…

It is hard to have the courage of your convictions and this is why even the most intelligent investors can struggle. Being aware of the emotional toll these price moves can have on you is an important starting point to combating this. As is a sense of perspective. For example, how did that Google search look in October 2012?

Slide3

If you had liked equity at this point, it would have been unwise to listen to the noise. Out of interest, it is important to look at recent price moves from a longer term perspective, it just about shows up on the chart:

Slide4

Does this mean markets won’t fall further from here? Of course not, however if your views have changed in the last couple of weeks be sure to be honest with yourself and ask why. Is it the facts that have changed, or how you feel about them?


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.