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Figures who don’t lie

Reading a recent article brought back memories of the expression “figures lie and liars figure”.  Rather than focus on specific items that triggered my reaction, you will probably get more value from a cautionary tale about the subtle ways Wall Street and the financial media lead investors astray. Not only will you learn how to see through their smoke and mirrors, I’ll share who you can turn to for investment advice — “figures who don’t lie”. 

Wall Street uses the financial media to encourage investors to take action by providing “experts” and articles that offer “special” insights.  They cite a series of events, economic measures or investment returns and tell you what they mean, such as fears of recession or what the inverted yield curve might be signaling. Unfortunately, these “figures lie.” Why? Because the data is almost always too limited, meaning there are not enough observations to draw a statistically significant conclusion. This shortcoming is more significant than it might be otherwise because the “special” insights run counter to findings supported by large, ongoing studies that have been carefully scrutinized in peer-reviewed, published research. 

What’s the connection to “liars figure”? The data and the conclusions aren’t picked randomly. They are selected, “cherry picked”, to promote a compelling story and give the impression that the author has a special skill. Unfortunately, this special skill is better described as luck because, while it might have worked in the past, too often it doesn’t work in the future, i.e. the desired result can’t be “consistently replicated”. 

Most troubling is when these experts justify their call to action by misrepresenting the nature of the data collected in long term studies.  They want you to believe that there is virtue in being quick and nimble and because the data was collected over a longer time period it is not sufficiently responsive. They fail to recognize that the significance of the long-term historical average as the expected return and that it can appear suddenly. They fail to explain how volatility decreases over time. Maybe that’s why they epitomize “liars figure”. 

Glorifying quick and nimble promotes behaviors that have proven to be harmful to investors’ financial health. Since the 1960’s, leading finance academics have used advanced computer programs to apply scientific testing standards to the study of investment behavior. Most, if not all, of them started by searching for ways to beat the market, similar to the techniques promoted by these “experts”. Over time, they recognized that the markets are so efficient at incorporating new information that investors are more successful accepting current prices as the best prediction of future value, which leads us to “figures who don’t lie”.

While the academic environment is highly competitive, the nature of scientific testing and peer-reviews of published reports elevates truth to its highest value. This was the culture John “Mac” McQuown forged when he built the team that created the first index fund. 

Mac and David Booth co-founded Dimensional Fund Advisors (DFA) to implement the great ideas in finance. While they associate their success with their close ties to leading academics, I believe it is their uncompromising commitment to the truth. To promote this culture, they work through independent registered investment advisors who are carefully screened for their understanding of investment behavior and commitment to their clients’ financial health.  

Since founding Lifetime Capital in 2006, I have worked with DFA, attending their educational conferences and advising my clients to invest in mutual funds they manage. Members of their professional staff have consistently met and often exceeded my expectations. Recently, I had the privilege to meet Mac McQuown.  This experience deepened my appreciation and understanding for DFA’s culture and those who have the privilege of working with them. They are shining examples of figures who don’t lie.

On December 4th, I will have the pleasure of interviewing Mac McQuown at the Commonwealth Club in San Francisco. The topic will be “Index Funds: Launching the Revolution of Modern Investing”. Please join us.

If you have questions about your investments, contact me. I will be happy to provide a complimentary review.

If you know others who could benefit from this message, please share it with them and let them know that I’m available for a free consultation.