To Get Back on Track, Don’t Overreact
How to separate the signal from the noise.
The job definition of a portfolio manager is (essentially) to separate signal from noise.
And, let me tell you, there’s a lot more noise out there. So, how do we do it?
Although I’ve written books on investing, this isn’t a post about that. While these concepts are applicable to the management of money, the focus here is on how to focus on what matters when you’re presented with a whole lot of noise—that way you can stay in alignment with your plans.
Some good news to get started
Separating signal from noise is fraught with psychological biases that can make it hard to measure your performance relative to your goal. In his paper Control Theory, Goal Attainment, and Psychopathology, professor of psychology at the University of Miami Charles S. Carver gave four examples:
Your perception is different from everyone else’s. “You think Susie is attracted to you, but it is clear to everyone else that she is not.”
Your perception is divorced from reality. “The gas gauge says ‘empty,’ and you perceive yourself as a mile away from the gas station that is really 10 miles away.”
You use the wrong signal. “Having the boss smile at you when passing in the hallway does not necessarily inform you about his opinion of your work.”
You’re ignoring the present situation. “When an anger-prone person fails to realize he is displaying anger.”
I don’t have solutions for all these biases. The good news, however, is that once you’re aware of these biases, you can identify when you’re going off track and take steps minimize their impact and get back on the rails.
To get back on track don’t overreact; instead, look at the trend.
Do you remember when you learned to drive? Within the first few minutes behind the wheel, the most important thing a new driver needs to learn is not to overcorrect. If the car goes off course, you don’t want to steer too hard the other way.
In the early years of my finance career, I overreacted to noise. It came in all forms. I’d get worried about a negative comment from a superior, a bad meeting with a client, a small trade error, a bad day in the markets for our portfolios, and many more such normal setbacks. In many cases, I was suffering from the bias Carver called “using the wrong signal.” And there was also an asymmetry at play: I’d sweat the minor negative setbacks, but wouldn’t overreact to noise on the upside, such as getting too excited about a good day in the markets. (That’s my personality and perhaps human nature.)
I also overreacted to bigger issues. Think: losing a large mandate from a client or not getting a promotion. A couple of decades later, I can say most of these seemingly more significant issues were also noise around an upward-moving career trajectory. It can be tough, however, to distinguish signal from noise in real time.
The easiest way to separate signal from noise is to take a long-term perspective.
Frequent measurements of performance against goals and adjustments are useful, but only if you’re also able to put them in the context of the long-term trend before you make major decisions.
Here are three questions that may help:
Where was your career five years ago?
Where will you be five years from now?
Does today’s setback change anything to that trajectory?
If you take this approach to the extreme for your career (or your personal or organizational goals), and like a Stoic, you put today’s problems in the context of your lifetime and eventual death, you’ll wash away the noise. Instead, you’ll end up with pure signal—the things that really matter.
In most cases, you’ll realize that you’re in a good spot and the trend is positive. Of course, the signal can be negative, in which case you’ll know it’s time for action.
Then there’s underreaction.
Underreaction errors can be more dangerous than overreaction errors. (Sometimes, the blinking light on the radar isn’t a weather balloon; it’s an incoming missile.) I learned this the hard way during one of the worst weeks of my career, but that’s a story for my book.
You can see this in play, for example, by considering how leaders misinterpret signals as noise when they manage underperforming or toxic employees and take too long to fire them. Firing someone is difficult and emotionally challenging, but most of us wait too long, to the detriment of team morale. Companies can also underreact. BlackBerry, Kodak, Blockbuster, and Sears, for example, all missed turning points in their industries and the suffered the consequences of their underreaction.
Mentors are another way to help you separate signal from noise.
Find someone with experience and perspective who doesn’t have skin in the game. Ask them to provide a clinical, unbiased assessment of your challenges. When emotions run high, it’s easier for someone who’s not involved to provide a clinical assessment of your challenges. (Also, this person is less likely to suffer from the psychological biases that we discussed above.)
However, you must work with a mentor who knows what they’re talking about. Even better, work with someone who has power in your organization. Mentors and mentees often begin with good intentions but fail to make a connection because the mentor is too removed or not informed enough on the issues the mentee is struggling with. It’s counterintuitive, but I’ve noticed that the more formal the mentorship program, the less likely it is to succeed.
To keep it simple, I like to think of it like this:
Find someone you can talk to about your challenges.
Talk to them.
Two steps. That’s it. (And don’t think you’re too senior, smart, or experienced to work with a mentor. You’re not. Some of the best CEOs in the world hire professional coaches or ask board members to mentor them.)
Signals comes in different forms.
Some signals arrive at a high frequency and should be dealt with quickly, while others require more information and more time to process.
Sometimes, a signal looks like noise. Other times, noise resembles a signal.
To separate the two, you must navigate your cognitive biases. You need to stay mentally sharp and focused. You don’t want to overreact or underreact, and you definitely don’t want to underreact to real threats.
If it sounds like a lot…it is.
But it’s manageable. And you can handle it.
Seb
Check out my interview with Ryan Hawk here!
When he decided to write a book on leadership and self-improvement, Sébastien Page was rejected by over 200 literary agents.
He was asked, “Why would a finance expert write about leadership?” He was told to stay in his lane.
Sébastien has more than two decades of leadership experience. As an author, he believes breakthroughs often happen when experts venture outside their field. That is why, in "The Psychology of Leadership," he went beyond finance and economics to study research in psychology.
He is currently Head of Global Multi-Asset and Chief Investment Officer at T. Rowe Price. He oversees a team of investment professionals actively managing over $500 billion in assets under management.
Sébastien won research paper awards from The Journal of Portfolio Management in 2003, 2010, 2011, and 2022 and the Financial Analysts Journal in 2010 and 2014. In addition to The Psychology of Leadership, he is the author of Beyond Diversification: What Every Investor Needs to Know About Asset Allocation (McGraw Hill, 2020) and the coauthor of Factor Investing and Asset Allocation (CFA Institute Research Foundation, 2016).
Sébastien is also a member of the editorial boards of the Journal of Portfolio Management and the Financial Analysts Journal, and the Board of Directors of the Institute for Quantitative Research in Finance (Q Group). He regularly appears in the media, including Bloomberg TV and CNBC, and was recently named amongst the 15 Top Voices in Finance by LinkedIn.
The power of mentors - what a great reminder on how best to leverage this to improve your personal and professional functioning!