Pragmatic Relationship with Data
Something I have been wanting to address for some time now is the tendency amongst many market observers to “anthropomorphize” one’s relationship with market and economic data. For example, I recently read this sentence: “If you want to look at the following chart and be depressed, then be my guest.”
This is problematic. In the Apprenticed Investor series, I have repeatedly cautioned against having an emotional relationship with any company, stock, or even an econometric measurement. A data point shouldn’t make you depressed or elated – all it should do is make you intellectually curious as to how this fits into the larger picture. It should just “be.”
Investors should get no more excited about Non-farm Payrolls or CPI or New Homes Sales than they should the summer solstice. It is a periodic phenomena, and your job as the steward of your own finances is to put it into the proper context.
I try to interpret events accurately, especially within the context of how most of Wall Street and the financial media covers economic and market events. I hope I am not tilting at windmills. Too many investors rely on misleading headlines, they fall prey to faulty interpretations, or they overlook major issues.
This often leads me to stake out positions some have called contrarian; others have termed it pessimistic or excessively negative. I find it to be neither.
It is not negative to say it will dark out at night, nor is it pessimistic to point out that up north, it is often cold and snowy in the winter. That’s how I read the data, as cyclical phenomena that gets better and worse on a periodic basis; It ain’t called the Business “Cycle” for nuthin’.
These have led me in the past to:
-Rail on (and on) about inflation, while for the longest time, most of Wall Street ignored it;
- Describe this jobs recovery as sub-par, while the Street raved about it;
- Identify option expenses as significant threat to Prices (based on reported P/E); - Positively discussed the impact of accelerated depreciation of capital spending;
- Describe Real Estate as an over-extended asset class – but not a bubble;
- Place double digit earnings growth, dividend increases, share buybacks and M&A activity into proper context.
An investor should be neither a cheerleader nor a jeerleader. However, given the overwhelming bullish bias of Wall Street, and the tendency of people to take headlines at their face value, I often find myself pushing back against the mainstream, if only to put these things into context.
This is not pessimistic – it is pragmatic.
Its opposite – dogma – is a great enemy of investors.
Monday, June 26, 2006 | 11:24 AM | Permalink
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amen
Posted by: Bob A | Jun 26, 2006 11:32:21 AM
Barry: OTOH, nightfall and solstices occur on determined and predictable time lines, whereas even strongly cyclical economic phenomena are subject to jitter, both in magnitude and timing.
Given that most economic activity ocurs on account of personal gain, and opportunity or difficulty thereof correlates with economic indicators, emotional responses of that sort should not surprise.
Hey, I have to spend much of my day on "economic activities". "Environmental" conditions (e.g. how the market for my employer's products is doing) do have quite an influence on whether things are easy or tough.
Posted by: cm | Jun 26, 2006 12:07:01 PM
on the other hand Barry...
"Talk about cash money- dollar bills, yall!
For the love of money
People will steal from their mother
For the love of money
People will rob their own brother
For the love of money
People can't even walk the street
Because they never know who in the world they're gonna beat
For that lean, mean, mean green
Almighty dollar, money
For the love of money
People will lie, Lord, they will cheat
For the love of money
People don't care who they hurt or beat
For the love of money
A woman will sell her precious body
For a small piece of paper it carries a lot of weight
Call it lean, mean, mean green
Almighty dollar
I know money is the root of all evil
Do funny things to some people
Give me a nickel, brother can you spare a dime
Money can drive some people out of their minds"
Posted by: brian | Jun 26, 2006 12:43:16 PM
The man is juking the CPI data to rob old people and government workers? That could make an overpaid CEO misty-eyed with its unfairness.
Posted by: Ned | Jun 26, 2006 1:00:35 PM
Barry--
I have to say, I don't understand your problem with a CPI that omits inflationary items. If public companies can help investors and potential investors understand their circumstances better by reporting pro forma results, I don't see why the government shouldn't be allowed the same helpful course. Perhaps we can have GAAP and pro forma CPIs?--after all, we're trying to privatize most governmental functions anyway, and wouldn't this merely be a part of that process?
Posted by: Scott Frew | Jun 26, 2006 1:59:57 PM
To quote Bob A above-- Amen Brother. This is a Great Blog. It's one of a few where you get the sense that the economic - historical Data presented here (and a large amount of it I might add) is viewed with an honest attempt to present it and analyze it in an objective way. The commentary from the 'regular posters' I see out here is also, for the most part, excellent. This is unlike the Financial news media that's largely ratings/subscriptions driven. No one wants to hear 'bad news'-- it's bad for ratings. So the "Optimistic Outlooks" or "Bullish commentary" on the Economy and Stock Market presented on the Financial shows and papers seems to be largely driven by Ratings rather than any Objective analysis on the "Data". And rarely do you ever-ever see any "Behind the Headline Number(s)" analysis on the Data thats released (manipulated or HipChecked) by the Federal Government.
But you do on this Site.
With respect to the Stock Market and Economy such an obvious and deliberate Bias on the part of the Federal Government and BubbleVision really shouldn't be a problem if you had the feeling the Market processed it, or 'Filtered" it, with at least some degree of 'rationality' that made some kind of sense. But it seems to me that within at least the last couple of years this Market is behaving with increasing Irrationality -- as though the once Professional Environment on Wall Street is being eroded and replaced with a Hollywood-- Gender Neutral, Blue Skies and Sunshine, American Idol, Tragedy T.V./Feel Good, Cable News Anarchonistic--Utopian Investor type of environment. (the behavior of Market on the day or so after, and because of, the Bernanke-Baritiromo Incident was priceless)
Also, too many economists/market analysts appearing on a regular basis on PumperVision continue to point to a roaring economy as though this should portend future stock market gains. I thought the Stock Market largely drove the news and was a Leading Indicator of the Economy. Not the other way around. A few days ago I saw posted here a Chart about the relative levels of Short Selling Interest in the Markets between the Professionals and the Public-- that the while the 'Professional' Interest has gone down the Public or Amateur Investor Interest has gone up. My take is the "average man on the street"-- John Q Public-- while not being able to articulate exactly what's wrong with the economy, certainly has a sense of where his personal financial situation is and "that not all is well out there" as what is largely being portrayed on BubbleVision or in the Financial Press as a Rosy economic scenario.
Posted by: John | Jun 26, 2006 2:08:09 PM
Scott,
LOL -- A guy I know is going through an ugly divorce. The reason? He reported his extra-marital activities while away on business trips on a "pro-forma" basis.
She no longer trusted him, and hired an "Outside auditor." Turns out there were some off balance sheet transactions the missus was none too happy about.
Apparently, there is still a big difference between pro-forma and GAAP accounting . . .
Posted by: Barry Ritholtz | Jun 26, 2006 2:09:53 PM
Ahhh. The ol' multiple "non-recurring" items among the one " recurring and regular expense" category. Yep, that'll raise the auditors flag every time.
Posted by: Mark | Jun 26, 2006 2:18:47 PM
Barry could you push the Fast Forward button on this market to after the FOMC meeting please? This is putting me to sleep.
Posted by: Mark | Jun 26, 2006 2:22:37 PM
It never ceases to amaze me how many on the financial talk shows act as cheerleaders for the stock market as if it will never have a bear market. Most mutual fund mgrs. are by nature bullish; they certainly don't want to discourage the $$$ inflow do they?
Watched Kudlow & Co. last night where Barry was correct in saying in periods of high earnings growth, the market doesn't do especially well - it's already had the move. I think Larry didn't want to hear that
Posted by: Steve C | Jun 27, 2006 8:47:42 AM
