Great Investors Know How to Interpret Data
I am working on the Eight Traits of the Insightful Investor.
These are skills that regular readers of "A Dash" will already know as part of their routine. New readers can enjoy the show, and everyone is invited to join in the comments. Please let me know if you disagree with one of my examples or even if you have a different slant. I am also very interested suggestions for future posts.
I have struggled a bit with getting this theme started. The basic reason is that I really want to be positive.
- I embrace the openness of the Internet tradition. I encourage other writers, and we all learn from free exchange;
- Information comes from many sources. I have cited cab drivers in the past. Eclectic is a motto for me; but
- Credentials matter. The flow of information is a fire hose. The investor really does need to distinguish between those who know something and the pretenders.
The average investor has been encouraged – mostly from the TV commercials from online brokerages which collect your commissions – that you can make a fortune by trading. You only need to learn a few simple rules, consult with their (rookie) phone helpers, look at some charts, set trading rules, and you are on your way to riches.
This is very wrong, but the error is challenging to explain. I cannot show the skills without also illustrating the blunders. In this series I will give the links to the sources (all prominently republished or I would not have noticed), but the identities are not the important feature. I am trying to teach the skill of critical thinking as applied to data. Those who disagree with a particular example may sound off in the comments. If someone objects to being cited, I welcome a rebuttal. I do not expect to get any!
See what you make of this chart.
The author correctly uses a log scale so that we can interpret growth in percentage terms. This is much, much better than many pundits who deceive you by making normal growth look like a hockey stick.
The author interprets the chart as follows:
"My analysis shows we are experiencing rapid inflation right now; but the way the government calculates its numbers masks the true story of inflation.
To understand what's at stake, we need to go back to Economics 101.
What we are now seeing in the U.S. economy is monetary inflation. This happens when the money supply increases. The increase in money supply eventually causes currency devaluation, which results in higher prices for goods and services as buying power declines—this is classic inflation. (Throughout history, monetary inflation has eventually become price inflation.)
Consider the chart of the M2 Money Supply reproduced below. M2 is considered to be a broader measure of the money supply—it includes savings accounts, deposits, and non-institutional money market funds, in addition to the currency already in circulation."
The entire article is aimed at scaring retirement investors, and it was given extra reach through republication.
If you really took Econ 101 you would probably understand that a larger economy requires a larger money supply. Try improving the chart in two ways:
- Let us suppose that you extended the time period. That would tell you if there was some recent alarming trend.
- Let us further suppose that you added GDP for a comparison. That would show whether money supply was disproportionate.
Here is what you would see:
There is nothing unusual about current M2 growth. It is a normal rate and it is also in line with GDP. If anything, the growth in the money supply lagged a bit in the post-recession period, the reason for the Fed's QE programs.
The entire post is much ado about nothing. The author is selling a scary story. I know not whether it is gooseschmitz or wolfschmitz. In either case, investors should not be buying this tall tale.
The Insightful Investor needs to learn what to read. When you spot bogus analysis like this, you might economize by skipping that source in the future. Maybe you could put the author on warning with a comment.
I have many other items for this series and I welcome comments and suggestions.