Oct 3, 2017
How Investors Can Avoid Noise, Short-Termism, and Overreacting
What charts are you looking at?
About a year ago, I started an experiment. I planned to only look at stock charts on a weekly or monthly time frame. I was finished with daily and intraday charts. I started my experiment and now more than a year later, I’m here to tell you about a few of my thoughts.
Think Bigger Than Daily Charts
The first thing I want to say is how the default time frame for most charting services, from your brokerage to Bloomberg and more, is daily. So, if you pull up a chart of a stock, commodity or cryptocurrency, you will immediately see a chart scaled to show each day of trading. This is a psychological problem not enough investors, new and experienced, look into. Because what it means is everyone, from your grandma to the random person sitting next to you on the commuter train, is looking at daily charts and not thinking twice about it.
This is a problem. It’s a problem because daily charts can still sensationalize stock price movements. Here’s an example — I’m going to show you two charts. The first, which is below, shows the S&P 500 on a daily timeframe right after Brexit happened:
This next chart shows the exact same move, but this time you will see it on a weekly time frame. Meaning each candle now represents one week of action rather than one day. You can immediately see the difference in the two charts:
Match Your Investment Perspective To Your Chart
Each day, we are shown daily charts and some times intraday charts down to the single second. I believe that this is a constant drum of dramatic visuals adding unnecessary pressure on investors. It forces them to think in the short-term or completely disconnect their long-term goals from what they’re seeing now. Great investors are masters at blocking out noise and filtering information. They are not easily fooled by drama or hype.
If you’re having trouble thinking through investments patiently, stop looking at short-term charts and avoid everyone who forces these charts on you. Smooth out your charts, zoom out, and change your time frame. This simple experiment has helped my portfolio since I started the experiment. Since the switch, I’ve traded less and held positions for longer. I’ve aligned my goals with my visuals and I can feel the impact on a deeper level.
The Now vs. The Now + Tomorrow
The daily flow of news and price action is enough to drive an investor mad. No other investor in history has had access to as much data and news than you do right now through your iPhone. Let that sink in. Or look no further than the legendary behavioral economist Richard Thaler. He studied and coined something similar calling it, “myopic loss aversion.” Behavioral Economics has a great definition of this term:
“Myopic loss aversion occurs when investors take a view of their investments that is strongly focused on the short term, leading them to react too negatively to recent losses, which may be at the expense of long-term benefits (Thaler et al., 1997).
This phenomenon is influenced by narrow framing, which is the result of investors considering specific investments (e.g. an individual stock or a trade) without taking into account the bigger picture (e.g. a portfolio as a whole or a sequence of trades over time) (Kahneman & Lovallo, 1993).”
If there’s one thing I learned from my experiment, it’s that investors need to be more aware of their time frame across of all of media and the default charts they look at it. It’s not only helpful, but it’s actually a unique tactic to avoid things like myopic loss aversion. You may not know it, but all those daily and intraday charts are having an impact on your decision-making. They are exaggerating the short-term on a sub-conscious level.
Don’t Forget to Zoom Out!
I find myself thinking about what our investing world would look like if everyone only looked at weekly charts. I believe we would have less day traders, less overreaction, and less retail investors feeling dissatisfied with financial markets. Everyone’s time frame would be expanded and every chart would be less dramatic no matter the TV show or media publication that shows it. I plan to keep this going and I would encourage every investor to try looking at weekly charts more often and daily charts less often.
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