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Before you invest, cancel out the noise

‘‘Signal-to-noise ratio,’’ an engineering concept, focuses on the amount of useful information being received, compared with false or useless data. This is an especially important concept for investors.

Over the years, I have been reducing the meaningless distractions in my investing. You should, too. You want less of the annoying nonsense and more of the significant data that allow you to be a less distracted, more purposeful investor.

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Finding moments of quiet contemplation that allow you to think things through is an important aspect of investing. Uninterrupted time with no distractions — no TV or instant messages — is increasingly rare — and all the more important for that reason.

And I don’t mean just quiet time in front of your computer. Such activities as jogging, yoga, and even meditation can get you out of your routine and provide an opening for deep thought.

Daniel Boorstin, who served as the librarian of Congress, once said, ‘‘I write to discover what I think,’’ and that is my process. I wake before dawn and sketch out my thoughts on what is happening in the market or the economy. (They show up on my blog.) I have found that articulating my perspective in a structured format is an enormous aid to understanding. It is more of an editing process, deciding what to remove. I spend much of this time deciding what is not worthwhile.

As a professional investor, I find this liberating and productive. We are all distracted by meaningless minutiae. Most of our daily inputs — news, company releases, economic tidbits, punditry — turn out to be distracting irrelevancies. After this editing process, what is left is almost all signal, and no noise.

It is not easy. Removing the noise is a fight against habits. But getting to the good stuff buried within the junk is important. Think about these inputs and what they mean:

 News: Most of it is actually old. By the time information hits the papers, it’s pretty much already in the stock price.

 TMI: Too much information can lead to overconfidence and bad investment decisions.

 Anecdotes: A good narrative is compelling, but the data are more determinative of future returns.

 Talking heads: Your goal is to safely grow your assets — but what are the goals of those you see on TV? What’s their agenda?

 Short-term goals: How much of your information consumption is short-term, meaningless noise?

Consider what would happen if you tried to assemble a ‘‘how-to’’ list in pursuit of the opposite goal we’re talking about here — if you wanted much more noise and much less signal. In other words, what are exactly the wrong things to do?

1. Constantly consume mainstream media. Treat financial television as an excellent source of actionable investing ideas.

2. Play down data. Stick with anecdotes from people you know and your gut instincts.

3. Pay attention to pundits. Assume they exist to help you reach a comfortable retirement.

4. Get the inside dope. Assume the important information about the stock market — especially when it is going to crash or rally — is known only to handful of insiders.

5. Stress about this. Exert lots of energy, spend lots of time, and create lots of tension about all of the following: the Federal Reserve and the taper, the dollar versus the euro, the Tea Party and Congress, hyperinflation, European sovereign bank debt, gold, China, deflation, austerity, and the Hindenburg Omen.

6. Don’t do the math — probability analysis is for geeks, anyway.

7. Stay in your comfort zone. Focus only on those news sources that are in sync with your politics. Seek out sources that confirm your preexisting opinions and investment postures. Never read anything that challenges your beliefs.

8. Think fast. Trading is where the big money is made! Don’t worry about the long term — it’s way off in the future. Measure your success in hours and days, not decades.

9. Have a super-happy fun time. There is no reason that you cannot also have a good time with your retirement account, right?: It is tax-deferred, so you have no capital gains consequences. Have fun with it — isn’t that’s what it’s there for?

10. Ask: What have you done for me lately? Never listen to people with good long-term track records who may have had a losing period. When Warren Buffett underperformed in 1999, you should have written him off. Investing is about recent performance!

These guidelines are sarcastic, of course, but I recognize a lot of bad behavior I see all the time from investors. It is a recipe for lots of noise and very little signal.

How much noise do you have in your investing process?

Barry Ritholtz is the author of ‘‘Bailout Nation.’’
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