Ticker Tube Tales

After a Stairmaster workout at my athletic club, I often find several members sitting there in the locker room, fascinated by the CNBC ticker.  I am fascinated, too: not by the ticker, but by their fascination.  These are not day traders.  Why do they find cacophony so interesting?  For me, the ticker obscures more than it illuminates.

That scene underscores something remarkable about investing.  Unlike most disciplines, investing does not have a common cadence.  Cosmologists think in terms of billions of years; geologists, perhaps millions.  For politicians, there’s a natural four-year rhythm.  Musicians produce songs that are roughly five minutes long.  For computer hardware engineers, nanoseconds matter.

But investing has no common cadence, and perhaps it is better that it doesn’t.  It’s analogous to radios.  We’re all surrounded by the exact same electro-magnetic radiation, but by tuning to different wave lengths, we each hear entirely different music. 

What is signal to one person is noise to another; with radio, it’s easy to tell the difference.  With investing: not so easy.  Consider this example.  Say I plan to retire in 20 years, which is to say I don’t need the money for 20 years, and then I do need it.  As with any investment, risk matters, and sooner or later volatility of annual returns is likely to enter the discussion.

Why annual returns?  Gee, I don’t know, but to me, that seems to be the most common basis for volatility calculations; maybe providers of data are trying to split the difference between day traders and Warren Buffett.  If the 20-year investment horizon above is to be taken seriously, volatility of annual returns shouldn’t matter.  The cadence doesn’t match.  What should matter is the volatility of 20-year returns. 

Plenty of investors miss the distinction.  Watching the herky jerky ticker movement is like watching trees swaying in a stiff wind.  In the process of entertaining, it diverts attention away from the long term growth rate of the trees.  Day traders, of course, believe there is money to be made in the storm, whether or not the trees are growing.  They might be entertained by time-lapse photography of a tree growing, but they will learn nothing useful from it.

When the cadence matches, there are even more insidious ways to learn the wrong lesson.  Data breeds confidence; more of the former means more of the latter.  But even a prodigious amount of data reveals little about rarely occurring events.  Decades of video of a tree, for example, whether time-lapsed or otherwise, says a lot about the growth rate of trees, but very little about the risk of a forest fire.  This, in my view, is the main point of Nassim Taleb’s book, The Black Swan.  It is a best selling book; we can only hope it is also best read and best understood.

Truth be told, the locker room TV is just as often tuned to ESPN, where learning the right lesson from the right data can be just as challenging: think Moneyball and Moneygolf.  Whichever channel the TV is set to, the mesmerized look is the same.  Which leads to another theory: CNBC is just another sports channel, meant for entertainment only.  It sure beats breaking a sweat.