behaviour
Noise versus signal
The rule
Most short-term movement in a number is just randomness dressed as news. The real signal is in the multi-year trend, not one quarter.
Where it flips
Sometimes the "noise" is the first true sign of a real break. Where it misleads: you ignore an early warning. The fix: dismiss nothing that the notes and the money owed to the firm also confirm.
The more often you check a jumpy number, the more noise and the less signal you see. One quarter's cash dip, one month's sales, one day's price, mostly random wobble. The three-year trend is where the real information lives. Step back and read the drift, not the jump.
A worked example
A cash-flow line swings up and down by 20% from quarter to quarter, yet trends slowly up over three years. The swings are noise. The steady drift up is the signal. [illustrative]
How to spot it
- ·judge on the trailing multi-year trend
- ·ask whether the change survives one more period
- ·cross-check it against a second statement
Nassim Nicholas Taleb · Fooled by Randomness