British science fiction writer Arthur C. Clarke said “Two possibilities exist: either we are alone in the universe or we are not. Both are equally terrifying.” We are optimists at heart and believe we are not alone. The universe is so vast that somewhere out there the juxtaposition of stuff that creates life had to happen somewhere besides planet earth. Seems to be a reasonable bet. But so far, no good.
Until now. Maybe.
Researchers working under an initiative known as Breakthrough Listen recently used the Green Bank Telescope in West Virginia to detect pulses of radio energy from an object known as FRB-121102, which is three billion light years away. These signals, known as fast radio bursts, could be coming from natural sources like new neutron stars or black holes.
Aliens are being considered a source because the array of possible natural sources would only produce a single one-time burst. This was not the case. The research team analyzed 400 terabytes (think 40,000 hours of Game of Thrones in ultra-high definition) of "noise" recorded over a period of time and identified 72 bursts of the same type, i.e., they repeated. The team has no explanation at this time and will continue to research.
This galactic signal-to-noise ratio reminds us of the mind-numbingly small signal-to-noise ratio investors deal with every day when it comes to market information, data and general news flow.
It seems now more than ever we are bombarded by noise given our ease of access to it: smart phones, social media, a multitude of network and cable news channels, etc. This "supply-side shock" of noise is unprecedented and makes finding the true and important signal ever more difficult.
Our approach to the noise of market and macroeconomic data is regimented. We first filter everything through our latticework of investment mental models that inform our understanding of how the world works — and not through someone on social media or a pundit on TV. We think about whether something has merit, is new, interesting, and pertinent to our understanding of the world and investment objectives. We debate both internally and externally with a close group of respected colleagues. We form our own opinions. We keep strong opinions that are loosely held: our opinions are flexible and adaptable to new data. Our opinions are held purely and without interference from outsiders who do not align with our investment principles and/or our process. Pundits be damned.
Despite the tsunami of daily data and news flow, we believe there is only a handful of high-powered, important economic indicators to focus on given our investment principles and/or process. We focus on those that help figure out where we are in the business cycle. We disregard most of the rest. When those important signals change, we change our opinions. As noise comes in we can easily and, importantly, quickly figure out if it is helpful or not.
We also like to test our opinions with "real-world" anecdotal information and not be beholden to geeky data. For example, have you tried to get a quote from a roofer lately? If you got a call back consider yourself lucky. And if you can get on a schedule within the next six months, you are really lucky. Remember, three years ago, the job lead time was six weeks, and six years ago it was six days! We use this type of "concurrent" data to validate our opinion on where we are in the business cycle — the economy is doing pretty darn good overall.
Like the Breakthrough Listen researchers, we will continue to filter the noise and find the important signals!
Contact Russell Moenich to learn more about this topic.
330.255.4330 | firstname.lastname@example.org