"There are three kinds of lies: lies, damned lies, and statistics." The statement refers to the persuasive power of numbers, the use of statistics to bolster weak arguments, and the tendency of people to disparage statistics that do not support their positions.
Statistics is a powerful to induce people to make wrong decisions based on numbers.
Consider the following statement: “Attempting to move in and out of the market can be a costly affair, particularly because a significant portion of the market’s gains over time have tended to come in concentrated periods. Looking back at the performance of the S&P 500 since 1980, an investor who missed out on only the five best performing days in the market would have ended up with a portfolio worth roughly 26% less than one that had been fully invested throughout the period.
Further, missing just 30 of the best performing days for the market since 1980 would have reduced the value of a portfolio by about 73%, compared to one that remained fully invested.”
Source: MARE: Market Analysis, Research and Education, Oct 16, 2008. “Stock market, exit at your own risk”
There is nothing wrong with the statement. All the above stated are known facts. However, it gives people the false impression that you will definitely lose out if you exit the market “prematurely” upon investing and you only miss out the 5 or 30 best performing days but got hit by all the worst days, which is unlikely. Basically, it condemns market timing and embraces long time investment.
Consider the market turmoil last year, if you had exited or cut your losses in Jan 08, you would have missed the 40% downturn. You would probably miss the 20% recent rally, but you will still be better off!
The notion that statistics lie is common knowledge, but we should also be mindful that the motivation behind each statistics evidence is to induce people to make certain decisions. Consider the following fictional examples:
There is an epidemic in Singapore. 10,000 people are infected and on the verge of death. A new drug is available. If you choose to administer the drug, you will save 5000 people. If you do not use the drug, 5000 people will die. What will you do?
There is an epidemic in Singapore. 10,000 people are infected and on the verge of death. A new drug is available. If you choose to administer the drug, 5,000 people will die. Will you administer the drug?
You should be indifferent on both choices. However, the above simple example shows that the way numbers are phrased and presented will induce different emotions (thus choices), formation of different perspectives and possibly even different investment or life philosophies.
I once had an IFA agent who used to service my insurance polices and investment, 2 years back. The first thing he did when he met me was to scrutinize my then present polices and lament on how poor protection I had, how irresponsible my past insurance agents were.
He gave me his blog address to show his superb knowledge on finance and his “many” testimonials of satisfied customers. Eventually, when I invested with him, he disappeared and when I asked him difficult questions, requested financial transactions, he even scolded me (without my name) in his blog and classify me as one of the “clients from hell”.
Eventually, I fired him and sold off all my holdings for his poor and tardy after sales service in 3 months. Today, he is still doing extremely well, possibly earning in excess of $150k per annum. (When I met him, he was earning $120k per year!) Well, he made use of statistics to help him earned a good reputation. Uploading positive testimonials of satisfied clients (minus the complains component); bragging on how accurate his prediction on market was by linking his past posts when 50% of his predictions were wrong; portraying an upright image on himself by thrashing tie insurance agents etc.
All the above are just another form of manipulation of numbers and facts to induce people to make favourable decisions, to erm the “owners” of statistical evidence.
So the next time people show you numbers to prove a point, take it with a pinch, opps, I mean with a bucket of salt!
