In order to be a successful investor — indeed, a successful anything — you need a healthy dose of skepticism. Not a gray, cloudy cynicism, (knowing the cost of everything and the value of nothing) but a specifically wary eye. There are many ways that data is presented, and unless you are cautious, you may miss the subtle ways it can be twisted and exploited.
In the markets, this leads to money losing situations.
This is a skillset that needs to be developed, and constantly honed to keep sharp. That’s the reason I look at so much economic data, trying to dissect it to get to the reality of the situation. The analyses of inflation, GDP, employment, NiLFs, Accelerated Depreciation, etc., are essentially intellectual calisthenics.
The comments on yesterday’s discussion of the WSJ’s take on the Fed Family Net Worth report were split. Some thought the WSJ was spinning the data, others downplayed the significance of the Fed report.
One comment led to an interesting discussion at U.S.News & World Report: The wealth of the nation. Its a classic example of the value of a healthy skepticism. The trick is retaining just enough of an open mind to absorb the valid assertations, but recognizing (not ignoring) any spin or rhetorical devices.
Michael Barone is a senior writer at the mag, and he also discusses the Fed report. Before going off subject — and then spinning away — he raises several valid points worth considering. Here’s the positive takeaway from that blog post:
• The Fed report does not distinguish net worth by age (leaving potentially valid econometric measurements ignored)
• No one is locked into the various income groups;
• Mean and Median measures can be misleading (we discussed this recently)
Barone’s focus is on the first issue — wealth changes in age group.
Its an interesting discussion, but unfortuantely focuses on a data point that is simply not part of the Fed Measure. (Here’s where that skepticism comes in). He carefully manages to ignore the key issue of the Fed report, which is that net worth gains over the measured 3 year period were scant — which is pretty much what you should expect in a post-bubble, post-crash period.
It draws several unsupported conclusions, and makes a few misleading ones. Hey, that’s what rhetorical arguments are supposed to do — argue for the point they are trying to make. (At least he doesn’t name call!).
In any investment thesis, your job is to identify the good, the bad and the ugly, discern those rhetorical twists, and give them appropriate emphasis or discounted weight.
The wealth of the nation is an excellent piece to practice your skeptical analysis on.