Garbage In, Garbage Out


Posted in: Economics, General, Stock Market, Thought of the Week

As long-term investors, we seek to profit on buying opportunities that instill fear and panic in markets. However, it is important to understand both the buying side and the selling side. In this case, I am referring to investors that sell a stock short (short-sellers). These are the people who to love to instill fear and panic in the markets. For instance, short-sellers attempt to profit from a decline in price, and then jump in front of TV cameras and publish articles that support their bearish case on the stock. Although sometimes these cases hold merit, most of the time they really are nothing more than ploys to earn a quick buck. The best way to distinguish which bear cases are legitimate is by understanding how these investors drew their conclusions.

Over the past week, a chart has been passed around showing the current performance of the Dow Jones Industrial Average (DJIA) versus the DJIA in 1928 and 1929. The author of the chart is predicting a rough time ahead for U.S. equities, and many investors have subsequently grown rather cautious. Our Investment Committee decided to do some analysis on the claim, and a few key points stand out:

  • Scales are Completely Different: The scales of the Dow charts from now and then are outright different, with last year’s 30% gain overlaid on the 1928-1929 bubble that was several times the magnitude. So, even if the past were to repeat, the Dow might fall to around the mid-to-high 12,000s. This is not a 1929-style collapse.
  • Apples and Oranges: Our economy now vs. then reveals almost no similarities whatsoever and the mistakes that were made in the Great Depression will not be repeated. Additionally, the Fed policy is completely different today as a direct result of the past.
  • Data mining at its Worst: The term “data mining” refers to the practice of endlessly analyzing data until one discovers a pattern. Think about gazing at the clouds in the sky looking for a turtle. Stare long enough and a turtle will most likely emerge from the shapes of various clouds, but that’s not a real turtle. In other words, manipulating data to support a desired outcome is often much easier than deriving a valid conclusion.

In conclusion, it is very difficult to make simplistic historical comparisons when there are fundamental differences between periods. Our Investment Committee sees very little evidence of our economy falling into another recession given our current economic environment. Your Chief Investment Officer, Chris Bertelsen, reminds us that markets go up in escalators and down in elevators. Those that publish such poorly constructed theses predicated upon highly questionable input data are merely trying to push the “down” button of the preverbal elevator and profit all the way to the ground floor.

Read this week’s Thought of the Week to learn more about the current talk of the markets.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.