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Wednesday, December 16, 2020

Why You Should Ignore Market Noise When Investing in the Stock Market

The stock market is always reacting to recent market news. The price of stocks can go up and down every single day from current news that’s happening. Warren Buffett famously said that like dieting, successful investing is far easier to understand than to accomplish. This is because it requires discipline. However, many investors did not realize that they are always affected by market news from various outlets. They are impacted by the market noises that are happening in the stock market. Market noise has become appreciably louder for most consumers since the internet has become widely available. 

If you are still new to the stock investing world, you need to read this article. Many amateur investors fall into this market noise trap. In this blog content, I will explain what market noise is and what causes the market noise to occur? Lastly, investors should ignore it and use this market fluctuation to their advantage when investing in the stock market.  


What is Market Noise?

Market noise is described as the opposite of information and covers all the market movements and analyses that produce hype, inaccurate ideas, and inaccurate data. Even things like automated trading programs and dividend payments cause market noise as they produce very short term moves that are not based on the overall market sentiment or trend. In theory, it is difficult to distinguish between market noise and useful information. 


The concept of market noise was first introduced in a leading academic paper by economist Fischer Black in 1986. In his paper, he stated that market noise and information are different, but most trading occurs based on market noises in the stock market. 

What Causes Market Noise?

Noisy traders primarily cause market noise. Noisy traders are traders who trade in a reactionary style. They are those who rely on trending news and get in very late after a big surge or decline has happened by trading from word of mouth, gut feeling, and most of the time without any professional analysis. Unlike the professional investor who tends to look at the fundamental analysis, sentiment, and the bigger picture. This causes any given financial market price to move widely in a given day but with none of the move reflecting the bigger picture context and fundamental. 


The rise of technology has also given birth to more algorithms trading in the financial market. These programs trade in and out of markets within nano-seconds and can cause huge spikes on a financial news release. With more and more program trading entering the market, whose systems rely purely on technical analysis, market noise will stay in the market. 


How do we avoid market noise and make sure we do not use the wrong information to get us into bad trades? It is pretty simple. Make sure you have a specific plan and methodology and make sure you do your homework. Do not be emotional and irrational when it comes to investing. The stock market always fluctuates, and you should use this time as an opportunity in your investment.

How Market Noise Affect Amateur Investor?

Market noise usually affects amateur investors who are still new to the stock market. When they hear certain news that’s happening in the stock market and see the value of their portfolio going down, they usually panic and quickly sell their positions to avoid further losses. You do not want to be this kind of investor because it is impossible to time the market. Market noise is dangerous because it compels short-term thinking and over-reaction that can wreak havoc with long-term portfolio gains. 


If you over-react to volatility, this increases the chances that you will sell low, only to buy high when you want to get back in later, after prices rise. As Buffett has pointed out, volatility and risk are two different things.


I apply value investing methodology when it comes to choosing stocks for my investment. I do not care how the market will react in the short-term period. When I invest in a stock, I see my stock picks as if I am buying the whole business. When you apply this kind of investing methodology, you want to see the value you are getting for the price you pay for buying the company. 


I will admit that when I was still an amateur stock investor, I was also affected by the market noise. I was not investing in stock as I do now. I was always checking the news update, which made me overreact and irrational when I am investing. I thought by becoming an active investor; I can somehow outperform the S&P 500 index. The result was the opposite. By actively trying to time the market, I was doing worse. My portfolio was doing very terrible, which led me to learn how to invest appropriately using value investing methodology.

How to Take Advantage of Market Noise in the Stock Market?

You see some investors panic when the market reacts a certain way. They are usually scared of seeing the portfolio value go down. If you are a value investor like I am, you should not worry about the market news. As a value investor, you want to pick a stock investment that is high in quality, price reasonable, or has a bargain valuation. I usually ignore the market noise happening in the stock market since most of my stock investment picks are aimed to be held for the long term. I make sure that the market noise does not affect my stock investment and use this time to my advantage.


For instance, when the market announces terrible news about a company I am holding, I will not panic about selling my stock because the price is going down. When something like this occurs during my investment journey, I will read the news about the stock market. I will then re-analyze the stock position, whether it is still a great investment valuation wise. If I do not see why I should sell the stock position, I usually will use this opportunity to increase my stake in the company. Yes, I am talking about buying more shares of the company when the price is going down. I do not panic to quickly sell my stocks just because of the market noise that’s happening. If the company I am invested in is still a great business and profitable in the long term, I will continue holding them as my stock investment.

Have a Long-term Thinking.

Furthermore, trading too much has high costs, including taxes on gains. If you occasionally trade rather than regularly, after owning stocks for at least a year, the long-term capital gains rate is 15 to 20 percent. Instead of listening to and trading on short-term market noise, investors are better off ignoring it and focusing on the long term.


Many declines and upsurges are driven by computer algorithms designed to trade automatically in response to certain price movements. Many of these programs sell automatically when the average price of a stock has declined by 10 percent. This trading is so massive it depresses prices. Much of the noise you hear about volatility stems from this type of institutional trading.

So, instead of listening to market noise and haplessly trading like a scared rat caught in a maze and bombarded by stimuli, put your phone down, relax, and keep your eyes on the prize: your long-term portfolio.


As I became more experienced in stock investing using value investing methodology, I now ignore the market noise in the stock market. I am accustomed to seeing my portfolio fluctuate up and down in value. If you can’t stomach a fifty percent drop in portfolio value, you should not be in the stock market. It is normal to see your portfolio fluctuate in value. Do not worry about the short-term investment horizon and instead look at the long-term investment horizon. If you are a value investor like I am, you pick great companies at great value when investing. You want to make sure that the companies you are purchasing will still be in business decades ahead. 


I am not worried about what will happen to my portfolio value in the short-term. All I care about is that I know that I bought great companies at a great and reasonable price. I want to hold these companies for a long-term period and only see the performance result couple of years ahead. I know by doing this, I can perform better with my stock investment. 


This is true when I am managing my stock portfolio. By applying value investing methodology and focusing long-term, I am doing very well with my stock investing. You can see my live portfolio page if you want to see proof of my performance over the years of managing my own portfolio.

Bottom Line

I hope this article I have written can help readers understand what market noise really is. I hope I explained why you, as an investor, should ignore the market noise. Do not make a decision just because you are panicking. You do not want to make an irrational decision when it comes to stock investing. It’s best if you read up books on stock investing. This can help you prevent from making a poor decision. 

As a value investor, you want market noise to be used to your advantage. Do not worry about the short-term fluctuation that’s happening in the market. Instead, remember always to buy stocks as if you are buying the whole business. Okay, that is it for now. I hope this article can be useful for you guys.

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