Statistics can be factual while not being facts. They are “truthy.” investors must understand.
In 1982, Harvard biologist, Stephen Jay Gould was diagnosed with abdominal mesothelioma, an incurable and aggressive cancer. The median life expectancy from diagnosis was eight months. He was familiar with statistics and statistical ideas and asked, “What does ‘median mortality of eight months’ signify in our vernacular?”
What he learned helped him defeat the cancer. He died in 2002 of unrelated causes. Read his essay from 1985 “The Median Isn’t The Message.”
The same message applies to investors.
Most investors understand the method of calculation, but they fail to fully see the meaning. Unlike Gould, that likely won’t kill them but it will imperil their fortune. Gould makes several points that resonate:
Studying variability does not help much. In the stock market it is noise driven by the emotions and needs of the people transacting business today. Those are not easily analyzed. Variability is always present and it must be absorbed into our strategic vision. As Buffett says, “It’s a terrible mistake to pay attention to those bobs ups and downs, because you will drive yourself crazy if you do so and become an inferior investor”
Statistical information is useful in that it can point to tendencies, but that is not the place to stop. It is important for each of use to learn what statistics are and how they are created, but it is crucial to learn ways to assess what they mean.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.