Financial Mathematics Text

Monday, October 20, 2014

How to Ignore the Noise in Financial News

One of the most difficult things we face in the information age is the problem of too much information. It's everywhere around us. There's absolutely no way for us to get through all of that information much less be able to utilize it.

There's even a good deal of research that indicates that, not only are we unable to handle extra information, that additional information may make us less accurate and more confident in our inaccurate predictions: The illusion of knowledge: When more information reduces accuracy and increases confidence.

Now it seems to me that there are at least three goals we need to focus on in order to handle all of this information:
  1. Focus on important information.
  2. Ignore the useless noise.
  3. Know what we do not know.
While I think this is important in general terms, there is the question of how to deal with financial news. 

Managing Financial News

Reality check: Most of the news in the financial press is absolutely useless; it's "noise".

So how can you focus on the important information and ignore the junk?

This is especially difficult if you're focusing on a popular stock such as Apple or Walmart. The news feed will have many items every day, most of which you should ignore.

One Solution

There may be many ways to accomplish this, I do have one technique that works decently well. I'll illustrate this using Yahoo's Alerts although other services may offer something similar.

Here's the idea.

If there's material news that will likely impact the value of your stock, one thing you'll notice is a large move in the stock price (whether up or down.) So if the stock price moves a good deal, that's at least an alert that tells you that you should find out why.

So how much is a "large move" in the stock price?

Well, that partly depends on the stock. But I think one way to think about this is in terms of the standard deviation (volatility) of the day-to-day price movements.

For example, the S&P 500 has about a 1% daily volatility. A stock like Apple is between 1.5-2% (and higher if you go back earlier). On the other hand a stock like Walmart might only be about 0.8%.

So a "large move" might be 2-4 standard deviations. So if the stock moves, say, 2-5% (depending on how volatile the stock is) you want to know.

So here's how to set this up:

First, you'll need to go to Yahoo Alerts and select Stocks Watch.

You'll need a yahoo account to do this but you can have the alert sent to any email address.

Now you'll end up on this screen:

Just enter in the ticker you want to look at and then tab over to the "Price drops by %" and fill in with an appropriate number (such as 4 for 4%). You can even set the "drops by" and "rises by" to different numbers if you're so inclined.

After you're finished you can save it. This will let you know if one of your stocks makes a big move (in which case taking a look at the news is a good idea.)

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