The Impact of Noise on Trading

by | Jan 8, 2011 | Uncategorized | 3 comments

Besides being successful investors, what do Nicolas Darvas (author of How I Made $2,000,000 in the Stock Market) and Bruce Berkowitz of Fairholme Funds have in common? Both recognized the negative impact that noise from other traders had on their investment performance.

Darvas was a professional dancer in the 1950’s who, against many odds, became a very successful investor for someone with no financial training and no mentor.  Much of his time was spent on the road in foreign countries but he received cables (the 1950’s version of a fax in a sense) sent to him by his broker with cryptic price information on selected stocks.  Without getting into much detail, Darvas would follow the price action of his selected stocks as he found they moved in and out of boxes.  He had become quite successful at trading and thought it made sense for him to trade from his broker’s office amongst other traders.

I was fascinated by my first visit to the office. The boardroom was large, with chairs placed in front of an ever-moving little machine, the stock ticker.  The atmosphere was exciting, filled with electricity. The people in the room, like hangers-on in Monte Carlo, were nervous, exalted. There was an air of action, bustle and noise. Tickers, ticking, typewriters pounding, telegraph machines clacking, clerks busily rushing around.  From every direction I heard sentences like: “GOODYEAR doesn’t look good to me.” “I am getting out of ANACONDA.” “The market is ripe for a reaction.”

Once he began trading from his broker’s office, Darvas’ investment performance plummeted much to his dismay. In time, Darvas recognized that he had abandoned his style of investing and was running with the crowd. Soon thereafter, he took steps to isolate himself from the Wall Street noise and focus on a handful of stocks.  His great investment performance returned as a result of his ability to ignore noise.

Bruce Berkowitz is considered by many to be the best mutual fund manager of his time. In 2010, he was named Domestic Stock Fund Manager of the Decade by Morningstar, as he had managed to beat the S&P 500 every year in the past 11 years except for one (the S&P 500 was up 29% in 2003 and Fairholme was up 23%).  In 2006, Berkowitz moved his fund and his family from Short Hills, New Jersey to Miami.  According to a recent article in Fortune magazine, the biggest reason for the move to Miami was that Berkowitz wanted to put some space between himself and Wall Street.  When he operated his fund in Short Hills, his office was in a building with numerous other money managers.  The presence of other money managers inevitably led to conversations about the markets which Berkowitz believes would pollute his thinking.  This is much the same problem that Darvas encountered when he tried to trade from his broker’s office in New York which had other traders present.

Noise comes to traders in many ways.  At times it appears as randomness in the prices of the securities we follow.  Noise presents itself as “experts” in the financial media put forth their prognostications even though research informs us that most financial forecasts by “experts”  are no better than random guesses.  Becoming a successful trader requires the ability to filter out noise that surrounds us.  I am aware of some successful traders who, during trading hours, retreat to their offices to read books of poetry or history.  Jesse Livermore said that some of the times that he made the most money was when he sat on his hands.

As we move forward in our development as traders, we must make a concerted effort to recognize that which is noise.



  1. Noah

    Not sure if it’s helpful, but I can recommend the following article:

    The author is working on her postdoc in political communication and is a journalist. The article is a little long, but the distinctions that the author introduces are worth the read.

    From what I understand, the attention of traders is bought and sold by media companies. These media conglomerates manipulate or make the markets. They don’t like you unless they can profit from you. Anyone good at prediction or profit who does not work for them is a target of distraction, confusion, or noise. Big media creates silence and hides it with noise. But what’s so quiet?

    The politics are interesting, you listen for the heartbeat of the world’s most corrupt institutions, by (not) following who favors them. I wonder what you see, waiting for the others to leave, so you can work. Are there more goods flowing than is visible in the markets to traders like you?

    I would think that is what you can’t hear, see, or profit from, unless you’re an insider. Or the trends reveal larger patterns. Ehh, you probably don’t think about it or find anything if you do. Besides, almost everything bought or sold is visible in the markets, except drugs, laundered money, people, illegal acts, and a few other things.

    According to the article, attention marketing parallels slavery. I think of some products as working like drugs, and traded goods as measurable in terms of psychological state produced in individuals. I think the more we understand, the more trading trends will look less like “following the herd” and more like modern slavery. Someday attention itself might function as money. If so, then politics and wealth will be truly inseparable.

    Silence will be really really quiet then. 🙂

    Anyway, sorry to ramble, the Project Censored article is more carefully considered, researched, and presented. Somehow politics, trading, and attention-manipulation intersect, I just know it.

    I won’t post here again, probably, because I have too little to offer, but what you do is very interesting! Thanks.

  2. Fred

    Noah: As much as I criticize the financial media, in my opinion they are providing what their viewing audience wants regardless of how uselss it is. For example, having an economist provide his year end estimate for the S&P 500. I did economics courses in university and I can assure you that providing stock market forecasts is neither an economist’s role nor his/her area of expertise.

    Successful investing as I do it isn’t emotionally exciting and it requires acceptance of the fact that I don’t know how well any of the markets I trade are going to perform in the next twelve months. You may be familiar with Dr. Phillip Tetlock’s research which covered political and financial forecasts. The “expert” forecasts were no better than a coin toss (i.e. no better than random guesses).

    Most retail investors want stock tips and for this reason when analysts appear in the financial media the host is usually required to get “tradeable advice” from the analyst. Regardless of how useless this advice is, investors want it.

  3. Noah

    Well, at least we agree that the media provides useless information.

    Thanks for this excellent information on trading, I think it has real value for traders who would find their work both unexciting and stressful, there are jobs like that, for example, being a patrolman, or a network admin, or a bus driver. Myself, I would take to it wrong.

    Someone posted an article on machine-driven trading on one of Mr. Covel’s recent blogs (Algorithms Take Control of Wall Street), I think that sort of information does not get enough press. The use of machines to cooperate in a certain kind of game, while the players find ways to cheat, through secret trades of different kinds, and ways to deceive other players and referees (the public), using the media, make me think that some kinds of mathematical analysis , maybe multivariate statistics+game theory, used to model the right information flows, would imitate what some Wall Street entities will eventually be doing.

    It’s my fantasy that the corruption would be detectable by small-time traders, but it’s probably not true.

    Good luck with your work! make yourself some dough.