Street Capitalist: Event Driven Value Investments

Here’s an excerpt from an interview with Nassim Taleb at Portfolio:

N.N.T.: A burning building is going to be a lot more anecdotal than a statement about what happened—and a statement about what happened is going to be a lot more anecdotal than statistics of what happens in the world to put it in context. To give you an idea, I go to Beirut all the time. If I watched television, I couldn’t—it would sort of convince me to not go. The risk of death is nothing, right? I mean, it’s minor compared to the risk of being killed in a car accident, you see?

L.G.: So statistically it’s more likely to have a car accident and injure yourself in a Westchester bedroom community than in—

N.N.T.: Than in Lebanon. Iraq is the only place where you’re vastly much more likely to get hurt or killed, but if you count how many people die every year in the States by car versus how many people die violent deaths in Lebanon, it’s minor.

World According to … Nassim Nicholas Taleb (Portfolio)

Taleb’s contrasting of anecdotal information versus factual information is important for investors. The news, especially on TV seems to have a habit of creating manias and panics. Just a week ago I witnessed this when my local news in Houston reported about “Hurricane” Edouard ,which turned out to be just a tropical storm. Instead of giving us credible information to make informed decisions (like the fact that most refineries in the Gulf of Mexico did not shut down) they bombarded us with footage from past hurricanes and gave out emergency precaution information.

Similarly, financial news outlets do the same thing. The minute-by-minute reporting of how the market moves only creates noise and clouds the judgement of investors. I don’t know if you have to turn off the news and stop reading newspapers like Taleb does, but you should know how to tune out and exploit it. The retail sector is a good example of this because they have to report same store sales on a monthly basis. The monthly reporting adds more noise to the market and makes retail more volatile than most. If you let the noise get to you, you’ll sell your positions out of fear because of the wide swings in a stock’s price that with missing one month’s same store sales estimates. But if you understand that the noise is often without merit, you’ll find that there are attractive buying opportunities created by these irrational movements.