A Healthy Dose of Skepticism

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.

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  1. B commented on Mar 3

    I like the perspective you outlined here. I think that is a good perspetive for nearly everything about life.

    It is hard not to be cynical and even worse when it comes to Wall Street. I classify myself as even worse on this topic. Their reputation for duping the individual investor, even sophisticated and rich ones, deserves a constant reminder that one should be from Missouri.

    A classic example are commodities and oil. The gibberish provided by WS is hard for me to stomach. There is no doubt there is global demand but the most likely answer gleaned from the real facts are that these alternative INVESTMENTS are being driven hard by traders and asset managers looking for a return they are unable to derive via equities. It fits the human behavioral profile and it also fits the key statistics of how those markets have changed post 2000. It also fits because someone like Richard Bernstein was able to make the call that these asset classes would explode a year before many even started to rise. And that statement was not based on global demand either because China was growing faster before he made his call.

    There is something that really smells foul when mostly American firms are driving commodities through the roof that punish average Americans then tell us that it is because of global demand as they rape the market for millions. Then when the markets crater, as these assets always do, the wrong end of the trade is the average joe who gets hosed becuase he is in late. Tell me how this is different than the pump and dump we heard in 2000 about stocks? I don’t know when it will happen but prices will come down alot. Maybe slowly, maybe very fast. Maybe in stages over years. Alan Greenspan made a speech a few years ago that I thought was prescient. To paraphrase, “We are likely to develop alternative sources of energy before we run out of oil just like we did with wood, coal, etc.”. While we are told we are at peak production, where are the facts to support it? The supply/demand curve has not changed for thirty years. It may and maybe the market is predicting that but so far the half a dozen reasons we are given for high oil are all gibberish. To date, there are very hard facts to support substantially new classes of investors and traders in the commodities markets. It also explains why classes of commodity assets that don’t have highly liquid, traded futures markets have not appreciated much in comparison to those that do.

    It was made crystal clear to me earlier this week when a bond trader was on CNBC Squawk Box. He said something like this to Joe Kernan. “I don’t want you to think traders are bad people but volatility is so low we cannot make any money. The last time we had this type of low volatility was the LTCM crisis. The traders are hoping for something like this again to increase our volatility.” Kernan was rather taken aback, qualified the statement as what he thought he heard and it was indeed as stated. And the trader said once again how they were not bad people. Kernan’s response was, “I’m glad you were the one that said it”. He then closed the interview by stating that we could all hope for the failure of some big company or something like this to paraphrase. Even good guy investment manager Grantham has said in so many words that investors hungry for returns are looking to alternative investments and it would continue.

    So, how is one not to develop a cynical, nasty attitude when the equity bubble, commodities bubble, housing bubble and oil bubble were all created or fueled by financial professionals with self gain in mind? Or that because a market really set up for free trade is really being used as a profit vehicle which also punishes people’s wallets. Of course, my perspective could be completely wrong and my “facts” could be incorrect. But what if I am not?

  2. juan commented on Mar 5

    B – Not to add to your cynacism, but consider as well that the higher price of oil has manifest as very much greater account surpluses in the oil exporting nations, and – from what B Setser has pieced together – a large portion of this expanded mass of petrodollars finds its way through third parties into U.S. Treasuries,,,so helps support the $ and mitigate difficulties financing our ever greater current account deficit.

    NB that the oil exporters surplus far exceeds that of, e.g., China.

    I would not doubt that some portion of the greater oil export earnings re-enters trade in commodity futures so assists in providing upwards price pressure even as enlarging crude stocks and relatively weaker demand should be moving the price to lower levels.
    Quite perverse.

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