Can You Discern The Dangerous Difference Between “Noise” and “Signals”?
Can You Discern The Dangerous Difference Between “Noise” and “Signals”?


Why We’re Programmed To See A Bear, Not A Boulder and How You MUST Fight This Human Default

One of the key differences between being a Strategic Investor and an Average Investor is learning how to filter out nonsense and make smart decisions based on market signals.

No wonder people are feeling like they can’t concentrate anymore. It is mind numbing the amount of information we have at our finger tips. How can this be bad? More info in makes better decisions in the end, correct? Well, not exactly.

Even a short 10 years ago our access to this vast stimulus of continual information wasn’t available to us and investors made smart decisions. 10 years ago people weren’t checking their Twitter accounts last thing before going to sleep, and first thing upon waking. Instant news and opinions weren’t at our finger tips or on screens everywhere we went, yet still we made great decisions based on long-term thinking.

This instant access (which I admit to enjoying immensely) is not adding to most Canadians’ ability to make good investment decisions. In fact, because REIN™ has been supporting investors and home-buyers for over 20 years, I can say that 10, 15, and 20 years ago there were fewer people confused than there are now.

The flow of contrasting information and day-to-day statistics is actually proving to be detrimental rather than the big benefit many believe it to be. Most of us were brought up to believe “Information is Power” so the more the merrier. However, there is a limit to the amount we really need. Ah yes, the Paradox of Choice… the more choices we have the unhappier we are. For investors, it is less a Paradox of Choice and more a case of information overload.

I am sure you must have noticed that everyone you bump into has an opinion on the real estate market: It’s a bubble; there are too many condos; there are not enough condos; it’s going to collapse; it’s a great opportunity; it’s better to rent than buy… and on and on. The internet, the parties, the media airwaves… they’re all filled with impending doom or unheralded confidence in the real estate market (both ends of the scale).

Never in my 20+ years of studying the Canadian real estate market has there been so much ‘noise’ surrounding the market. And sadly I am finding, with a little bit of investigation, that a lot of the noise is coming from those not overly experienced in the property market cycles, spurred on by the explosion of social media and the “blogosphere. ” These often under-informed opinions (both overly positive or overly negative) get a lot of traction and a lot of attention. And they get even more attention if they are used to attack other people/opinions.

Some people think this is actually helping their cause when in fact it is making them look very petty and very small minded. People are drawn to these ‘fights’ for entertainment and some investors even get caught up in the whole “us vs them” mentality. Once you, as an investor, are drawn into a ‘personality’ fight, it is easy to get hooked. It has happened to the best of us. And once you’re hooked it completely distracts you from what is most important: finding the facts you need to make great decisions for you and your family’s financial future. (You think the celebrity mags have figured this out for themselves? People are drawn to fights and personalities rather than taking care of their own needs.)

Investors today, whether they’ll admit it or not, are not only dealing with information overload – they are also dealing with the emotions that some bring to the discussion. Not only is that sad, it is also dangerous if you don’t have the tools to filter it out.

Time To Turn On The Filter

In Nassim Nicholas Taleb’s book Anti-Fragility, he points out the importance of differentiating between ‘signals’ and ‘noise.’ Because, in today’s market, we are all overwhelmed with so much instant information flow (Twitter, Facebook, smartphones, etc.), his research proves that many people make bad decisions because they confuse the general information flow (noise) with the things that really matter (signals).

Human beings are hard-wired for protection so therefore when walking through a forest you are more likely to think a rock is a bear (danger) than a bear is a rock (safety). That is why we are drawn to ‘seeing danger’ in the information flow. We skip over the important information to get to the perceived ‘danger’ signs. And that is why you see so much fear being pitched in headlines, articles, blog posts etc… because that is exactly what humans are programmed to look for.

Knowing this pre-wiring, the strategic investor has to master their ability to filter – to discern between noise and signals. By focusing on signals we can see opportunities, we can look for REAL danger signals, we can stop being caught up in the “Availability Heuristics” that the general population think are truths.

One of the best tools I have learned in recent years is the “Final 30 Foot Rule”. Although it is a harsh rule, and quite possibly filters out some good information along with the majority of the garbage – it is a hard and fast rule that most investors can use to make their life easier and the picture clearer. I described how this works in a previous blog post here.

Another tool I use is a simple restatement to those who are running around telling people what NOT to do (i.e. don’t buy real estate, it is about to crash, don’t buy this stock because it is crap, etc. etc.). When someone tells me this I politely ask two things:

1. What is your experience and what have your results been in this field? (part of the 30 Feet Rule)
2. I understand that you are telling me NOT to do it. So what should I do that will help me get to the financial place my family and I want to get to? (It is easy to tell people NOT to do something, there is absolutely no risk in that. But giving direction takes careful thought and analysis. This question often elicits very poor answers).

Another way to filter out those who really don’t have strong technical arguments is to watch them to see how fast they personalize their arguments. As soon as they leave their arguments to attack the person who’s argument is different from theirs, you immediately know they don’t really have a strong position. A strategic investor knows that a real life and helpful debate comes from parties stating their positions, supporting them with their research and experiences – and NEVER, EVER shifting their arguments to attack the other side personally. As soon as this happens, most of us walk away in disgust even if the person had some good points to share.

Separating E-Facts and E-Fiction

Confusion about what the noise is and where the actual signals are hidden is becoming even more difficult as anyone can loudly shout through their electronic bullhorn on the internet. This is not only in real estate but in all areas of life, especially as we enter 2013, which will prove to be the year of the Protest.

Fortunately for the real estate investment business, once your filter is in place, your ability to make strategic decisions becomes increasingly more simple, the added benefit being that as the confusion ramps up in the general population you stay clear and thus identify opportunities more quickly. The strategic investor stays out of the fray (as much as humanly possible). She knows that her portfolio expansion remains dependent on the business relationships she builds and the filters she has in place for not only properties but also for information intake.

Again, success in real estate is about building portfolio strength based on market fundamentals. It is about the facts, not guess work.

As a strategic investor it is important to view and read the signals the market is sharing, review those who put out realistic and fact-based arguments from both sides of the market (pro- and anti-). Then, and only then, must they distill all of the information down to their own opinion based on their particular situation (risk tolerance, capital availability, length of time etc.). Each individual sits in their own financial and emotional position today and has their own personal goals for the future. That means, the choices they make are going to be different than what others would make.

Begin your filtering today:

1. Noise vs Economic Signals
2. Positions vs Personal Attacks
3. Opinion vs Facts
4. Your Goals vs Other’s Goals

And most importantly, be aware of Availability Heuristics – just because you have heard it many times before does not make it correct.

Can You Discern The Dangerous Difference Between “Noise” and “Signals”? was last modified: July 5th, 2013 by maddy
 

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