Finding "True Signals" in Volatile Markets

Writing on the CFA Institute’s Enterprising Investor blog last month, founder and CEO at SVM Asset Management Colin McLean says “volatile markets raise[] the noise level” in talk about investing, and “the challenge for investors is to find the true signals.” He warns against listening to “perma-bears” and “false comfort” alike, pointing to lessons from behavioral finance. McLean says history bears out the importance of “cutting through the noise of volatile markets,” stating that “before the financial crisis, key information was being overlooked by most investors and commentators.” Further, he says, stress in credit markets and unusual behavior in housing and inter-bank finance that proved to be true signals was “effectively submerged” despite being “accessible and ostensibly public” – it was “hidden in plain sight.” He thus warns that “when conventional research metrics do not seem to apply, market behavior should not necessarily be dismissed as irrational” because “the facts may have changed in a way that conventional news sources are missing.” McLean suggests that banks can offer a good source of “submerged wisdom” – particularly by eavesdropping “when bankers do talk about what’s really going on” such as in “blogs, bulletin boards, or specialist websites.” In addition, McLean says that “superficial correlations can mislead” because the information driving extreme market behavior “often accumulates steadily and persistently.” He recommends “looking at what others are doing as opposed to what they are saying, and searching more actively for any wisdom that drives such behavior” in an effort to “recognize that new signals matter.” Thus, “investors should commit more time to looking for deeper explanations for market behavior.”