Saturday, May 2, 2009

When facts are false

"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!

6 comments:

musicwhiz said...

Hi SG Blue Chips,

Good to see you posting again after a nearly 2 month hiatus. Hope everything is going well with you. How are your studies coming along ?

In terms of using statistics and numbers to confuse and obsfuscate, yes I've had experience with that too when people write books either supporting market timing or thrashing it. The statement you quoted on missing the best days is misleading, I agree, because in the first place you need to purchase the right companies ! People who comment on the market in general (instead of individual companies) make a lot of generalizations based on a huge amount of data, which they can manipulate at their will to achieve the desired results. It's easy to use numbers to your advantage when you have a whole mountain-load of them at your dispense. This is the reason why I am wary of such market "soothsayers" and prefer my own approach of analyzing companies and their business prospects. Of course, this is an intensely personal choice and I not not necessarily advocating it for others; it's just that it works for me and I can sleep well at night.

As for the IFA you mentioned, I think such people are too "clever" to get caught in the act and though I feel what they do is morally reprehensible, they still continue to prosper and rake in the money. I think you need a thick skin and to bury your conscience when you hide the bad and trumpet the good. Suffice to say I've even seen this on a certain forum from a particular person who is quite well-known, so it's no secret that this goes on very often.

People like me who tend to show the good AND the bad are seen as "fallible" and lousy or soft; thus people like me cannot be salesmen because by nature I am too honest. This is why I have a desk job ! For people to succeed in sales, whether it's marketing their "expertise" or so-called superior money-making abilities, it requires one to tread the thin veneer of half-truths to loudly proclaim the successes, and quietly sweep the failures under a carpet.

I've realized this is the way the world works. It sickens me yes, but it's something I have to accept. Many rich people are made in this way, by giving talks, seminars to people willing to listen to their "expertise"; as well as salespeople who peddle half-truths to succeed at the expense of others.

Don't be too disilluioned bro. Take care,

Musicwhiz

la papillion said...

Hey bro,

If I were you, I'll report him to MAS so that more pple will not fall under his trick. If he's not independent FA, then lodge a complain with his company.

We need less of such pple and it's our social responsibility to report :)

Sgbluechip said...

Hi MW, thanks for the encouragement! Studying is hellishly hectic, yet intellectually rewarding. My main point really, was on the IFA who gets rewarded for lying and claiming that other (agents) lies! Sicko man!

In fact, I have already gotten emails to identify him, but sorry folks, I will not identify him even using initials as my blog entry already serves the purpose of education. It is not meant to break another's (gold) rice bowl!

Yes, those who peddle half falses (same as 1/2 truths) often get rewarded much better than us, but that's the way of life, we as can only verify our claims using our own logical analysis.

Btw, how come I do not see any IFAs declaring how many complaints/clients drop outs they have received? haha!

Sgbluechip said...

Hi LP, basically he has done nothing wrong! He just states the facts and omit the negative facts. This is when truth is just the tip of an ice berg.

He does complain that he gets complains for telling too much truth though!

Ironic yah!

laychee said...

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Professor V said...

Hi SGBC,

Great point in the article, well said.

The interesting thing i have noticed is that the amount of research in Singapore is much less compared to that in the US (Actually, for that matter, maybe it is much less in other stock markets as well).

Interestingly, that Oct 16 2008 research conveniently cuts off before the crash.

In case, if the same stat was repeated on March 9, 2009, the stat was -2% returns annualized for the preceding 25 years for stocks. (I read this in a Bloomberg magazine)

At any point, one has to go back to basics, look hard at the numbers till the numbers start telling you a story and then one decides if one likes the story.