My wife and I have an 11-month-old son who is, thankfully, a great sleeper. With the help of my baby monitor, I can tell you exactly how great – the night of Wednesday, August 19, 2020, he slept from 7:00PM to 6:46AM – 11 hours and 46 minutes. His weekly sleep summary email tells me that he achieves 99% “sleep efficiency”, has an average of 2 minutes “sleep onset” and needs zero visits from his parents to make it through the night. We are very lucky, to say the least – particularly as we try to maintain some control over our lives despite the whirlwind of new parenthood (and a global pandemic). The monitor itself offers a subscription service which provides additional “Insights” into a baby’s sleep and patterns for a yearly fee. But it is possible to reach a point where too much data can become paralyzing and actually impede the decision-making process.
Probably the most in-your-face bonus feature of our baby monitor is a fabric band (sold separately), imprinted with a special pattern of shapes, that can be wrapped around your sleeping baby. The monitor watches the movement of the pattern as your baby moves and breathes, to make sure that the baby is breathing and to alert you if its software detects any issues. While we are conditioned to believe more data and more monitoring is always better, there is unfortunately little evidence that these products are useful. The technology works inconsistently, and the inevitable glitches in the connection, video feed, and software’s analysis leads to false alarms. This in turn can lead to plenty of extra anxiety – probably the last thing already sleep-deprived new parents might need.
In the investing world, many of us view our own investment portfolios as restless babies, in need of constant monitoring. The average investor, particularly do-it-yourselfers, checks her/his portfolio too frequently, makes changes more often than necessary, is prone to costly market timing errors and make panic trades based on information from overly vigilant attention. The chart below has made the rounds on social media and television innumerable times. It shows the dramatic difference between the performance of various asset classes overall and the performance of individual investors. If the average investor were to simply hold their investments unchanged, as opposed to making ill-advised changes, their returns would be much higher.
In today’s world we have access to – or perhaps are subjected to – a frankly inconceivably large amount of data. There are over 300 hours of content uploaded to YouTube alone every minute. A strong argument can be made that a portfolio manager’s most important job is to tune out the noise and react only to new information that significantly changes their prior beliefs. When we choose a new company for our clients’ portfolios, we do so with the intent of holding it for 10, 15, 20 years or more. Based on in-depth analysis of the company, its competitors, environment, risks and opportunities, we have an expectation for how the company will develop over time – which often has little relationship to the stock price and its fluctuations. We choose to sell that company only when some aspect of our investment thesis has changed. While there are hundreds or thousands of articles and bits of news created every day, most of it does not impact the company’s long-run outlook. Our job is to determine which ones do, and act accordingly.
In a world of almost infinite information, available for free, anyplace, instantly, no investor can build an advantage just through constant monitoring. Instead, we believe that a deeper understanding and better investment returns can be achieved through experience and analysis – and knowing which information is important and which is not. The constant firehose of information predisposes us to make changes. After all, our subconscious tells us, if it is being published, it must be important, or correct, or both. Portfolio changes are then made based on the data’s effect on our psychology, not because changes are necessary. Over time, allowing the noise to affect your decisions can lead to poor performance and more anxiety. A capable portfolio manager should allow you to breathe more easily and sleep better at night. Perhaps you can use a software-enabled fabric band to prove it.