Investing Signal and Noise

If you are into politics, you must have heard the name Nate Silver. He came to fame in 2008 with his blog called FiveThirtyEight, where Silver aggregated public opinion polls to accurately predict 49 out of 50 state’s Presidential election results. His peak power came during the 2012 election in which Barack Obama defeated Mitt Romney, Silver accurately predicted all 50 states’ results. He wrote a book with the title, The Signal and the Noise, and thus the title of this article.

For the next two elections, Silver had an up-and-down experience. His model, along with the entire mainstream media, failed to predict Donald Trump’s shocking win in the 2016 election (he had 45 out 50 states correctly). He then got back on the winning column by predicting the Biden-over-Trump 2020 election correctly (Silver had 48 out of 50 states right).

Now, I am not here to discuss Nate Silver, politics or the merit of public opinion polls. I do, however, want to mention the simplicity of his model and its shocking accuracy in the grand scheme of things. He got 192 out of 200 state results right in four elections, all by aggregating existing public opinion polls. If there is a way to pick stocks with anything close to this type of accuracy, we would all become rich in no time.

Does a simple signal to accurately predict stock performances exist? If it does, we can simply use that signal and become millionaires, right?

What’s the signal and noise for investing?

If you’ve read my article All You Need in Love Investing, you would know the answer already. But before that, let me tell you my journey to discover that signal.

I started buying stocks in May 2006 after opening up my Roth IRA account with $4,000, the limitation of IRA contribution that year. The first stocks I bought were Circuit City, Nucor, P&G and Wells Fargo. These seem like an odd collection of choices, but they weren’t. A few months prior, I read an at-the-time bestselling book called Good to Great, by Jim Collins. It featured these companies as “great” companies whose stocks have dramatically outperformed the market over a period of 15 years. Why were they so great? The book introduced a series of concepts to illustrate, including: “Level 5 Leadership”, “Hedgehog Concept,” “Flywheel,” etc. Some of these concepts became corporate lingos we use today. In a sense, the author has identified these companies as the New England Patriots, Pittsburgh Steelers and Green Bay Packers of corporate America, with great leaders, employees, discipline, culture, history and everything. Their stocks have performed greatly in the past, so there is no reason to believe they won’t continue to do so in the future, right?


Nucor’s stock peaked at $82 in May 2008, was hit hard by the 2008 financial crisis a.k.a. The Great Recession, and never recovered. Today (Feb 2021), it’s at $58.04.

Wells Fargo went to a plateau at around $40 in Sep 2008, then it was hit by the recession, recovered well and went to as high as $66 in January 2018. But as it turned out, its “recovery” was fueled by rampant corporate fraud at the expense of its customers. Its stock and reputation have tanked since. Today it’s at $37.83.

Circuit City? Remember the electronic store with the red logo? It’s the worst of them all. It never survived the Great Recession and went belly up on November 2008.

Lastly, P&G is the only exception in my portfolio. It’s at $127.12, just off its all time high today at $142, and has become a pillar among my holdings. I will discuss this stock and my relationship with it later.

Generally speaking, most of the “good-to-great” companies Jim Collins profiled under-performed the market since the book came out, so bad that in 2009, he wrote another book called How the Mighty Fall, partly to answer the relentless questions his readers threw at him “what happened to your ‘great’ companies?”

Are these Good to Great companies great investments?

Books aside, let’s focus on my investments.

So all my holdings, except P&G, met uninspiring fate. Did I lose my shirt? No, it’s even worse. I lost my mind. After buying these stocks, I couldn’t sleep. I was watching their ticker numbers going up and down every day. When there were up, I was happy. “Man, the Level 5 Leadership is working,” I thought to myself. When it was down, I was pissed. Did the flywheel not turn today? Doesn’t the market appreciate the Hedgehog Concept?

In July 2007, a little over a year after I opened the account, I started noticing grey hair on my head for the first time, which I assumed was due to stress over this $4,000 IRA account. I said, “screw this. I’m still single. No stock is worth ruining my look.” So I sold everything. I had an excuse too, since I started graduate school that month, so I cashed out my IRA penalty-free to pay for my tuition. No regret.

No regret indeed. When the Great Recession hit a year later in 2008, I was still single, I didn’t have a job lined up post-graduation, Wall Street and the housing market collapsed, and the whole world was spiraling out of control. But me? I was sleeping soundly, all because I no longer held those God-forsaken “Good to Great” stocks, and I felt the greying of my hair was temporarily slowed.

That was the start of my investment career. I had no idea what I was doing, because I had no idea what these companies were doing. My financial future, along with my daily emotions were enslaved by the hope that these companies would be great investments to justify my decisions. That feeling sucked.

But what also intrigued me was why these companies didn’t do well. If a famous author spent years researching and identifying these “great” companies, and they performed well in the past, why wouldn’t they keep it up? What kind of stock would do well? Are there rhymes and reasons for stocks’ future performance? Can I find any signals and insights to identify future winners?

To answer these questions, I started investing again in Dec 2009, after finding my first job after graduate school. It had decent pay, so I put most of my savings into the market. I laid out and tested different investment philosophies and methodologies. I brought and sold hundreds of stocks, and grouped them into different portfolios based on the underlying philosophies, and compared their performances against each other. Some were based on math and financial data, some were based on speculation and day-trading, some were valued-based, some were growth-based, and some were even based on business rankings such as brand equity and employee satisfaction. When I could get my hands on the data, I even backtracked their performance for years to test them out. It was like a Hunger Games for investment portfolios. May the returns be in your favor!

Gradually, the picture of a winning philosophy started to emerge. It’s like when Tom Hanks in Cast Away finally made a fire after so many tries. It was beautiful.

And here is the surprising part: it is not at all what I would have predicted. I would have thought the winner would entail complex math and finance knowledge. It might require multi-variance data analysis. I might need to day-trade while staring at an up-and-down chart composed of weird lines and rectangles. I might be required to make bold and smart decisions with every move, like a chess champion. No, none of that was true. The winning philosophy was incredibly simple and intuitive.

This was how I felt when I discovered the winning philosophy


The portfolio that performed the best was solely made of companies whose products and services I loved.

How can this be? Am I some sort of prophet, or worse, octopus, whose affinity for certain things can have some unexplained predictive power?

Actually, yes! No, I’m not a prophet nor octopus, but I am a regular consumer with regular taste. I spend money to buy things for my family and myself. When I buy products that turn out to be awesome, I fall in love, and I buy more and tell everyone about it. I start to anticipate more product launches from that company. I start to trust their leadership and marketing messages. That’s a strong signal that the company knows what it’s doing.

For example: I bought my first iPod in 2005 and instantly fell in love with the device. That love started my fandom with Apple. I bought my first iPhone in 2007, first MacBook in 2008, and first iPad in 2012. Over the years, I bought different upgraded versions of these products again and again. Based on my calculation, I have spent over $30,000 on Apple products. I know, disgusting! I’m the shameful American consumer who can’t stop spending money and getting into debt. Right?

Hold your horses! My spending is a signal to me how much I love Apple. Over the years, I’ve invested about the same amount of money in Apple stocks ($30,000+), and now they are worth well north of $100,000. In many ways, my insatiable appetite for Apple products has actually made me richer.


Now you heard about the signals, what about the noises? There are many: financial data, quarterly earnings report, headline news, valuation, market timing, business books, you name it.

Financial data: how can financial data be useless, you might ask? Aren’t they the tools we use to analyze company health and stock valuation? The reason is simple: you don’t know what to do with them, and you are bad at this numbers game. Metrics like Price-to-Earnings ratio, Earnings Per Share, Debt-to-Equity Ratio, Free Cash Flow, Return on Equity, Synergy Per Meeting, Jerks-to-Copy Machines ratio etc. are only useful if you have the in-depth knowledge and financial model to calculate their relationship to stocks. Even if you do, that’s not a game you want to play. These are public data, and tens of thousands Ivy League-educated Warren Buffett wannabes are crunching numbers in order to make the right play. If 85% of them underperform the S&P 500 index, you think you can outsmart everyone and beat the market by looking at financial sheets?

Quarterly earnings report: every quarter, the CEOs of publicly traded companies are obligated to come out and talk about their sales and profit numbers, and provide guidance for the future. They serve little to no use for Love Investors. The earnings reports all come out after market close, and the price would immediately shift up and down after-market to reflect the content of these reports. By the time you, the retail investor, see these reports, the changes have already been priced in. If you invest in the long-term and still love the product, they mean almost nothing. In the end, these reports are more or less business theaters for the Wall Street analysts.

Headline news: now, I am not saying headline news for a company is entirely useless. They are only useful when it impacts your love for the company. For example, let’s say the headline says “Google is facing regulatory challenges in the EU”. Well, that doesn’t sound great, and Google stock will likely dip temporarily. But should you sell your stock? Does the news actually impact your love for the company? If you, for some reason, simply can’t bring yourself to use Google search or watch Youtube without EU governments’ blessing, then fine, sell the stock. If it doesn’t, don’t sell! It has nothing to do with you. As long as the products are awesome, Google will likely be fine. They have smart people figuring out all the operation and business issues.

Level 5 leadership, Hedgehog Concept, Flywheel, Valuation, Mode, What Mark Cuban just said in an interview, and everything else that has nothing to do with your love for the company: we as human beings have a tendency – we want to feel smart. We think we can outthink the market by looking at the smart-sounding noise. In reality, unless you are a genius, you have no advantage using these factors in making investment decisions.

Unless you are a seasoned professional, you don’t want to invest using the noise. And here is the secret: even most of the seasonal professionals suck at this game too.

In the end, can you really ignore all the noise and invest only using love? My answer is YES. As long as you are not someone with very peculiar tastes, like a passionate AOL user in 2021, you can be a Love Investor. (Use the 5×5 Love Exercise to see how weird you are). In fact, investor legends Peter Lynch has long advocated that retail investors have the edge over large fund managers precisely because of our closeness to everyday products. And I would argue that you shouldn’t play any game of real consequences if you don’t have an advantage. Your love might be wrong on one company, but it’s pretty unlikely to be wrong for 10-30 companies. If you build a diversified portfolio using your love and hold on for as long as you love these companies, you will make much wiser decisions than using noise.

There will be many techniques on how to do Love Investing the right way, such as investing rate, portfolio building, emotional control, and diversification. But if you have products you love in your life, you will have all the signals you need. With love as the signal, you will understand investment on an intuitive level. You will understand that stock investing is not a mysterious discipline mastered only by the select few, but rather an amazing wealth-building tool that can be used by all of us. More importantly, you will sleep well at night, and your hair-greying will be due to causes other than your stock portfolio.