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Date Posted: 4/12/16
By Kevin Carpenter, contact: kcarpenter@kca-us.com
 

Every day, we are exposed to numbers illustrating the significance of impactful events.  However, the presentation of many of these figures is misleading if we don't take the time to think about what exactly they are saying. Take the example of news stories talking about percent changes in the market.  Because percentages are calculated as the change from the prior value, the percent needed for a value to return to its prior level is always greater than the percent it went down in the first place.  If oil drops from $100 to $30 per barrel, that's a 70% (70/100) drop in prices.  However, for oil to get back to $100, it must climb 233% (70/30).  So when the news gets excited that $30 oil has increased 33% to $40, remember thatdoesn't add up’s only $10 of the original $70 in the back of everyone's mind.  For commodities and stocks, be sure and consider the absolute value change (the $10) as well as the relative change (the 33%), and judge for yourself which has a more meaning to your investment portfolio. A second example is the negative rap the notion of "average" seems to have acquired.  Walk into a PTA meeting and state that "half the kids in this school are below average" and see the reception you get.  But if the average is calculated to be about the middle of the pack, then by definition, about half will be below average.   (And before my college stats professor gets up in arms - yes, I know they difference between median and mean - but it's close enough for this illustration).  I promise I heard a news article slamming the federal administration for high gasoline prices because "almost half of the drivers are paying more than the average price of gasoline".  Regardless of your political affiliation, this is using statistics for the purposes of evil, we can only imagine where in the class distribution that particular reporter finished.   However, as I've written before, the danger of averages is when we latch onto it and believe that it is the only possible outcome.  Looking at the average historical returns on an investment fund is only one of the considerations you should make in choosing to invest.  A more complete approach is to examine the year on year changes over time and was there a correlation to other market changes and are those changes likely to remain consistent. Can you live with the degree of ups and downs?  Will you plan to leave your money in the fund to weather the downturn and capture the upside? Finally, consider natural statistics and how they can suggest upsetting events when actually there are none.  One day, feeling a bit mischievous, I came to my boss who managed 120 people and said,  "do you realize that 40% of the employees that call in sick do so on a Monday or a Friday?" 

Remember the "4 out of 5 dentists surveyed recommend sugarless gum for their trident-four-out-of-five-dentistspatients who chewed gum"?  Other than being a great marketing tagline (we all remember it still), does it really tell us much?  We don't know 1. how many dentists were surveyed, 2: what percent of their patients chewed gum (my dentist has never asked if I chew gum…Did yours?   And if you had a patient that chewed gum why in the world would you NOT recommend sugarless gum?  What exactly did the other dentist suggest? https://www.youtube.com/watch?v=xAVALXH9nxU  

If you're going to try to change the world - you'd better understand the impact of statistics.  There was a report a few years ago how all the drivers in a certain western state were going to not fill their cars on a pre-arranged date to protest high gasoline prices and affect the demand for gasoline. The timing on when you fill your car won't have much impact.  However, if they all agreed not to DRIVE on a certain day, well…

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