Last week in San Francisco, the weather forecast was calling for a slight chance of showers north of the city, most likely around noon. In the heart of the city, while grabbing my morning cup of coffee, I was getting drenched because I thought I wouldn’t need an umbrella. That got me thinking about “Navigate the Noise,” a book by Richard Bernstein. He wrote that people seem to pay a good deal of attention to weather forecasts. People value the forecasts so much that news programs will purposely show them last to encourage viewership.
The irony is that the forecasts are often inaccurate and simply unreliable (as the weather is inherently unpredictable). Bernstein used this to make the point that we unwittingly accept information that is likely to be incorrect (thus useless) and ignore information that is likely to be correct (thus useful). For example, a forecast that “it will be cold in February” will be dismissed as obvious. It is obvious, but more importantly, it is very likely to be correct.
As I saw first hand, weather forecasts can fail within a couple of hours. The reality is I would have been better advised to remember the obvious – April is likely to have “spring showers.” This is all a long-winded way of cautioning investors not to miss the “forest for the trees.” At the end of the day, the proverbial big picture matters, and it’s important to recognize that all financial markets are somehow influenced by macro-level forces; it’s not the other way around.
We’ve all been guilty of getting caught up in the pretty, blinking lights on our monitors. And though it may seem harmless, it’s far more dangerous than getting caught in a spring shower with no umbrella.
Victor K. Lai, CFA