Context Matters Most

Do not seek out numbers in the hope they will provide you with knowledge.  They rarely do so.

Take $1,000 as an example.  It is a cheap car, an expensive hamburger or a poor retirement income.  Maybe a very good retirement income in some countries.  You don’t know what a number means until it fits with something else.

Numbers in context can mean something but you must be a little careful.  Be especially careful with numbers that tell about money.  For example, many Canadians have enjoyed super-normal returns on investment funds that are US dollar denominated.  Over the past two years the Canadian dollar fell about 18% against the US Dollar.  When converted to C$, investment yields on US Funds look about 9% higher than they really are.  The same thing happened with Japanese funds in the late ’80s. You could make 50% in a year while the underlying investments in local currency did not change at all.

To get the same future returns you must assume a further currency decline.

Everything is relative.  If my sales go up $10 million I will notice.  Wal-Mart probably wouldn’t.

In a financial statement, numbers are everywhere, but only relationships among them matter.  Earnings per share maybe.  Cash flow per share.  Margin.  Debt to equity.  Do not pay a lot of attention to something like year over year sales increase.  Maybe they opened 500 new stores.  Better, what were same store ratios?

You cannot take numbers at face value. Is the number you are comparing not only correct but valid. Maybe last year’s sales were way low and up 10% is terrible.

One of my sons once came home with 88% in calculus and I asked him what the class average was.  He seemed shocked that I would ask that, but on reflection he said it was 81%, but that did not mean much because most of them could not figure out averages and some could not figure out percents.

Similarly, a single blood pressure or blood sugar reading are not particularly useful, but they should not be ignored.

Many people take numbers seriously and others ignore them.  Both are wrong.  Addressed properly, numbers provide clues to where you should devote productive research effort.  Research is essentially the creation of context.  You look for what the number means, not what it is.

Always provide context where you can, explain that you cannot when you have nothing, and never believe any number, in isolation, means anything at all.

Contact: don@moneyfyi.com  

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

This entry was posted in Communication, Decision Making, Investing, Personal Finance and tagged , , . Bookmark the permalink.

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