Torturing the Data: Investors take heed!
Here at "A Dash" my main mission is finding the best sources and accepting a wide variety of viewpoints. I write a weekly update giving a perspective in various time frames. My recorded positions vary over time, but I always use the same indicators. If there is a change, it is a gradual process –carefully explained and reviewed. This does not happen often.
I try to set an example for an objective approach.
A Disturbing Trend in Honesty
In recent weeks the stock market has declined. Journalists and pundits have rushed to look smart by retroactively explaining the market move, or by reminding readers that they were "early" on the housing crisis (i.e. permabears).
This grab for the headlines, eagerly embraced by many journalists, has led to a disturbing outcome:
There is a bull market in torturing data!
Every day there is another parrot who dismisses actual data in favor of anecdotes and explanations of why this time is different.
There is a simple reason for this. The parrot lives in a world of slogans and so do you. You do not understand economics or causal modeling, so you have a bulls eye on your chest. Repetition is crucial. Interpreting data is hard. Headlines are easy. You are a target.
Here are some crucial examples:
- The yield curve — long history, many historical periods including lots of Fed control. Never a recession at current levels. But this time is supposedly different.
- Jobless claims — emphasized by bearish pundits when it had a five-handle but ignored now. Never a recession at this level. But this time is supposedly different.
- Money Supply — perhaps the longest and strongest relationship. Go read Milton Friedman to see the correlation with nominal GDP. We can argue whether the result will be real growth or inflation, but something is happening. Meanwhile — this time is supposedly different.
My Viewpoint as a Methods Prof
I offer this as a professional in research methods — student, model developer, teacher, and consumer of models for 40 years. Most of the people you see on TV or read about have not taken a single class in research methods. They have NEVER developed or tested a model. Their prominence in the media reflects marketing rather than skill. It is a sad commentary about who is featured on TV. When I see someone I do not recognize I look at the bio. Often it says something like "frequently quoted." Sheesh!
It is intellectually dishonest to start with a conclusion and keep changing your methods until the data fit. There should be a most wanted list of people doing this right now, including some of the most frequently cited sources. You can spot them if you look.
A Journalistic Challenge
Here is an idea. What if journalists looked for the cheats who change their methods and then wrote hard-hitting articles that highlighted the shifts. That would be tougher than trolling for quotes, but more helpful to readers. Maybe someone could give a prize for journalism that actually went against the grain.
Just a thought….ivory tower, no doubt.
I know from conversations and email that many investors are paralyzed with fear, unsure of how to get started.
I recommend that you formulate a plan that has the right size for you — one that can accept the expected volatility. The next step is to find some stocks to buy.
Do you expect inflation? I do. What rate are you getting on cash? Most investors (and I say this only in general terms, since everyone is different) would benefit from a few great stocks with good dividends and good balance sheets.
For new clients I am still buying the stocks referenced — JP Morgan Chase (JPM) and Apple Computers, Inc (AAPL). Despite my forecast last weekend, Felix let the gold miners (GDX) out of the penalty box, so we added to positions there.
On a strict valuation basis, even with a reduction in earnings expectations, I have not seen so many great opportunities since the bottom in 2009.