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New Year's Financial Resolution: Ignoring the Noise

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I started my 2011 financial resolution early -- sometime in the middle of last year. So I guess it wasn't a New Year's resolution. But it's worked so well that I want to share it. Almost everybody can better their financial performance by following it.

I'm tuning out the noise and focusing on what matters.                                        

The first thing I did was abandon cable TV. All of it. This was long overdue. TV is quickly losing relevance to the Internet.

More importantly, ridding TV from my life freed me from one of the great addictions of the investment world: cable news. Particularly CNBC.

The value of cable investment news was best summed up by The Daily Show's Jon Stewart. While interviewing CNBC's Jim Cramer in 2009, Stewart poked fun at the constant stream of empty chatter that flows out of the network.

Cramer tried to explain. "We have 17 hours of live TV a day to do."

Stewart shot back: "Maybe you could cut down on that."

I cut back completely. And you know what? I'm a better investor because of it. I've written this before, and I'm absolutely convinced it's true: There's a negative correlation between investment results and time spent watching investment news.

It's nothing against CNBC, really. They do a good job at what they do. The problem is the beast that CNBC -- and many others -- feeds: investors' unhealthy addiction to information. This is an addiction that's turned hazardous over the past decade as the Internet mushrooms the volume of information exponentially.

How can more information be a bad thing? As Black Swan author Nassim Nicholas Taleb recently wrote, "The calamity of the information age is that the toxicity of data increases much faster than its benefits."

Here's a good way to understand what he means: Track news headlines throughout a trading day. You'll be amazed at the inanity. I remember a particular day in late 2009. Markets were down in the morning, and a headline read "Stocks down on disappointing jobs numbers." Markets then rebounded in the afternoon, and a headline proclaimed, "Investors turn bullish on job numbers." Stocks finally ended the day flat, and along came the headline, "Investors uncertain about jobs numbers." The more you paid attention to news headlines this day, the less informed you became. This is becoming standard in the journalism world.

Should you just ignore all information then? Probably not. The trick is separating the noise from the relevant. That's the key that distinguishes successful investors from the crowd.

Take Walter Schloss, an investing legend and longtime friend of Warren Buffett. In a famous 1984 speech, Buffett said of Schloss: "I don't seem to have very much influence on Walter. That's one of his strengths; no one has much influence on him."

Adam Smith elaborated in the book Supermoney:

[Schloss] has no connections or access to useful information. Practically no one in Wall Street knows him and he is not fed any ideas. He looks up the numbers in the manuals and sends for the annual reports, and that's about it.

Schloss ignored the noise and focused only on what was important to him: the fundamental value of the companies he invested in. That's what made him a great investor.

Buffett himself has a similar story in creating the success of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) . "I find it an advantage to be in Omaha instead of New York," he once said. "I worked in New York for a few years, and people were coming up to me on the corner and whispering in my ear all the time. I was getting excited all the time. I was a wonderful customer for the broker." By stationing himself in Omaha and ignoring Wall Street's noise, Buffett can focus on what's relevant to him: buying cheap companies and holding them forever.

So how do you separate the noise from the relevant? It's something very few ever master. I won't pretend I have. But here are a few tips to keep in mind.

1. Realize the difference between learning and acting
I read a lot. It's my hobby. Books. Blogs. Papers. You name it. Almost all of them tempt me to act on something. I try not to. I realize that most of what I read is simply to learn. That's it. When I want to actually do something -- like buying or selling a stock -- it's a separate ordeal that involves analyzing information I've already read and acting independently of others' opinions. There's a subtle but important difference between the two.

2. Go for a walk
There's typically a legal "cooling off" period required when buying guns. There should be for investments, too. Whenever you're tempted to act on investment news, stop and go for a walk. Sleep on it even. Given the chance to think things through with a cool head, you'll be surprised how often you change your mind and realize you were tempted to act on an irrational impulse.

3. When all else fails, become blissfully unaware
Buffett tuned out New York. I tuned out CNBC. If market noise is consistently getting the best of you, there's no shame in tuning it all out. Stop reading financial news. Buy an index fund. Dollar-cost average every month. Come back in 10 or 20 years and see how you're doing. With your new free time, go to the beach. Odds are you'll still do better than most active investors.

I'll be ignoring the noise in 2011. How about you?

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Berkshire Hathaway is a Motley Fool Inside Value pick. Berkshire Hathaway is a Motley Fool Stock Advisor selection. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (16) | Recommend This Article (57)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 14, 2011, at 2:14 PM, RealMainah wrote:

    Sounds like a wonderful idea just to buy Berkshire and let Warren do the work.

  • Report this Comment On January 14, 2011, at 3:34 PM, mattsmithsd wrote:

    I love how you bring up the point about the Jobs data being reported in 2009 as the stock market fluctuated. My father and I are always laughing at how the media writes a story based on what the stocks are doing, rather than focusing on the true reasoning behind the stocks movement.

    I haven't owned or watched TV for several years. I've never found anything on the television that is useful in my daily life; therefore, I don't watch it. I was recently going to write an article about the "Luxury" items people buy or subscribe to and how they are unnecessary. TV was my main focus, next was Smartphones, then Soda/Coffee, etc... Cut out TV and you can save $60 bucks a month. Get a basic cell phone plan and save another $40 a month. It all adds up!

  • Report this Comment On January 14, 2011, at 4:32 PM, Fundament wrote:

    I like the idea of passive investing and buy and hold strategies. I don't like ETFs and index funds or something else that cover a value. Do you remember how many stocks are in the DOW as of today that were part of the DOW in his foundation year? It was only one, GE. The Dow is a survival index. If you buy an index fund, you don’t buy companies. This could be a security strategy to safe your own money, because dead companies are no longer part of the DOW. That’s right but you also lose big opportunities of small and mid caps that climb into the DOW.

    Buffett is a dividend growth investor. He bought tough stocks with strong future growth. Buffett’s stocks quadrupled dividends and gave him additional money for invest, a self-accelerating process. Finally, Buffett worked within the financial sector, especially in the insurance industry. He got additional cash from his insurance holdings, a additional accelerator. I think the most of us could not cover the Buffett story but what we can learn from his career is his investment philosophy of steady growing dividends and steady reinvestments in robust companies. If you want to make money, it could be a first step to buy Dividend Champions. Those stocks increased dividends over more than 25 years. Here is a table of such companies with some fundamentals:

  • Report this Comment On January 15, 2011, at 12:55 AM, TMFserjing wrote:

    Nassim Taleb's quote was brilliant. As was the anecdote about the news headlines. I use Google Finance for a quick rundown of my portfolio and has personally seen the absurdity of some of those 'headline' news reports. Hopefully, more of others can learn to tune out the noise and focus more on what's really important : 'Finding great companies and invest in them, and enjoy the ride'.

  • Report this Comment On January 17, 2011, at 4:17 PM, hachmujt wrote:

    I have not had cable TV or regular TV for 8 years. We just use Netflix now and choose what we want to watch.

    I encourage everyone to join in. I have no regrets.

  • Report this Comment On January 17, 2011, at 4:28 PM, wrongnumber wrote:

    Mogan wrote: <i>There's a negative correlation between investment results and time spent watching investment news.</i> Has anyone determined whether there is a correlation between investment results and time spent on internet investment articles? I think I need to get back to basics (show me the balance sheet).

  • Report this Comment On January 17, 2011, at 4:53 PM, 7footmoose wrote:

    Well written and thoughtful, thank you, I think I benefited from taking the time to read this piece.

  • Report this Comment On January 17, 2011, at 6:06 PM, richie54 wrote:

    Nicely done, as usual, Morgan.

    Cable television still has relevance...if you enjoy reality shows.

  • Report this Comment On January 17, 2011, at 6:46 PM, Alg0rhythm wrote:

    Warren Buffet sounds like a guy I'd like to work for/with.

    I appreciate his "realness".

    He's not just saying whatever drives up his bottom line.

    I always respected him for not wanting to burden his children with excessive unearned wealth.

    For investing

    He knows the basics, find a good company, people with good ideas and a plan in the right niche.

    They'll get it right if they listen and learn from mistakes.

    I'm sure he talks to someone in the company before he invests, not just what the broker, making a commission says.

    He definitely understands the numbers, if he got big in insurance.

  • Report this Comment On January 17, 2011, at 6:48 PM, Alg0rhythm wrote:

    Basically, with all news, they've stretched the hour news into 24 without any more in depth information or analysis.

    A lot it is owned by people with their own portfolios, and ideas, and nobody likes to hear their employees badmouthing other things they own.

    The people I would listen to, before doing my own research and investing, aren't the people on TV.

    Jim Kramer was called by an analyst friend on the street a "muppet". I think if I knew Jim Kramer I would steer our conversation from investments.

    I hardly ever watch TV, almost nothing worth watching, but it is a good idea to have a window to the world. Sports, too, is still endlessly fasinating... people at the top of their fields working to find a way to make it happen. Still, a guilty pleasure, because if Americans learned to analyze the government the way they do sports, and talked about it half as much, America would have no problems.

  • Report this Comment On January 17, 2011, at 7:37 PM, Geofool101 wrote:

    CNBC is an awsome channel for investing ideas. You can get ideas that are timely. Using common sense and CNBC can be productive and profitable.

    I think 17 hours of live TV is an exageration (yes, Cramer can be animated!) Much of what they cover is repeated throughout the day, but some of it is very good.

  • Report this Comment On January 17, 2011, at 8:22 PM, mountain8 wrote:

    As a former,very bitter, dissapointed journalist I can state without reservation that no journalist is unbiased. And every editor or publisher has an agenda. They don't care about truth, honesty, public welfare or decency. Just cash and readership numbers. All I ever contributed to and was told to contribute to was a slanted view of actual events. Not open lies, but not the whole story. True, but not accurate. I quit reading newspapers a long time ago.

  • Report this Comment On January 17, 2011, at 10:41 PM, MKArch wrote:

    Good article Morgan. I think the problem with CNBC and most financial journalist is they excel at extrapolating what just happened out forever. I try to find the few out there that seem to have an idea about what's going to happen.

    During the dot com bubble Buffet wisely took a pass on tech stocks and at the time was ridiculed for it. There were a handful of investors (now famous) that saw the problems in housing while that bubble was forming and profited from it bursting.

    Not that I consider myself a great investor but during the panic of late 08 early 09 I saw it for what it was just panic and tried to find ways to take advantage of it. I'm in the top 1% of CAPS now and have been in the top 2% for about a year and a half because of this. I had to endure being in the bottom 1% for a few months to get there though but even then I was convinced I'd be back on top when everyone stopped panicking.

    I think it's tempting to take from this that the key is to be skeptical or a contrarian but I don't think doubting everything is healthy either. To me the key is critical thinking, intellectual honesty, the strength to stand by convictions with an equal amount of humility to admit you were wrong when it's clear you were wrong. At least this is what's seemed to work for me so far anyway.

  • Report this Comment On January 18, 2011, at 2:41 AM, Bel8490 wrote:

    Should I now check-out from Fool's newsletters to improve my financial wealth?

  • Report this Comment On January 18, 2011, at 11:00 AM, mtf00l wrote:

    I bought BRK.B after the split at 83 and it hasn't regained that value since.

  • Report this Comment On January 19, 2011, at 9:23 PM, CMFTomBooker wrote:

    Housel... I missed this article when it was posted, but i'll throw this in anyway..

    IMHO, a great metaphor for info-noise baths like CNBC, FoxNews and a whole bunch of others is a tapeworm.

    A tapeworm affixes itself to the host, then proceeds to inject its secretions. These chemicals induce the host to crave that which the tapeworm needs, in forfeiture of that which is "healthy" for the host.

    At least some probability of outcomes includes the idiocy that the host dies and takes the transfixed tapeworm with it.

    I bring that up, because I think I can make the argument that sometimes the worst of outcomes can be produced with two witless co-conspirators rather than a lopsided predatory situation.

    Think about the volume and precision of the multi-variable analysis now available to the entity delivering the product. The power of this is not lost on them. The risk is.

    Immediately commences the "whatever works" approach, and the product starts to be messaged. What begins is a co-reinforcing loop.

    If you iterate this loop a bazillion times, what do you risk?

    In a vulgar oversimplification... you give them what they want, in some moral-blindspot deference to that which they.. need. Which is what is "healthy" for them.

    A painful intellectual abdication to watch is "but that's what you asked for."

    Nice try. but the customer doesn't operate in a vacuum. As you morphed the product, you skewed their perception of that which they are really in pursuit.

    Pretty soon you are trying figure out who de-toxing the most.. the service/product provider or its consumer.

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