I ain’t no Numbers Guy.
It’s important that you know that about me because most of my views on investing have been influenced by what the Financial Freedom Community learned about what the historical stock-return data really says during its Great Safe Withdrawal Rate Debate of recent years. I lack numbers skills, and yet I rely on a data-based construct (the safe withdrawal rate is determined through analysis of the historical stock-return data) to form my views on investing. That makes sense?
Yes, that makes sense.
I used to worry that my lack of skills in the numbers department disqualified me from offering advice on investing topics. To understand investing, you must know how to work with numbers.
Isn’t that so?
No, that isn’t so.
Do you remember the scene in The Wizard of Oz in which Dorothy’s dog Toto pulls away the curtain covering the blowhard pretending to be a Great and Powerful Wizard and the blowhard entreats his listeners to: “Pay no attention to the man behind the curtain!”
That’s where things stand today re many of the “researchers” who report to us what the historical stock-return data reveals about how to invest successfully for the long term. A good number of these people don’t know what they are talking about. They think they know something about numbers, but they really do not possess a sure grasp of even the basics. The field of investing research is filled with phony Numbers Guys.
That puts me (and you too, perhaps) a step ahead. I know darn well that I don’t understand numbers. It’s better not to know and to know that you don’t know than to think that you know when in fact you do not.
I’ve come to believe that my most important qualification to write about investing research is the fact that I understand much of it so poorly. My lack of skill in this area has caused me to focus on what my common sense tells me about how stocks work, and to place my faith in common-sense insights over numbers-rooted claims that are in conflict with what common-sense reveals. The result is that I have become skeptical of many of the claims that we all have heard in recent decades about what the historical stock-return data says about how best to invest for the long term.
One Numbers Guy I have come to trust is John Walter Russell, owner of the Early-Retirement-Planning-Insights.com site. Something that Russell says over and over again is that a statistical analysis that does not include consideration of confidence levels is not worth much.
I was looking at the blog published by Nassim Nicholas Taleb (author of Fooled by Randomness) and I saw this statement: “The most distorting comment in his article was in reporting my statement that it was ‘moronic to predict’ while omitting the remaining part of my idea ‘without establishing an error rate for a prediction and keeping track to one’s past record of accuracy.’ My entire idea is that a prediction without confidence level (as commonly done in cash flow and economic projections) is just like astrology. And he transformed my message ‘don’t rely on risk measurements with a high error rate’ into ‘don’t manage risks.’ ” Taleb is saying that a statistical analysis that lacks consideration of confidence levels is not worth much.
More and more pieces of the puzzle are fitting together all the time. I ain’t no Numbers Guy. But I like to think that I possess enough street smarts to know when I am being conned. I think it is fair to say that a lot of what I have been told about what the historical stock-return data says about how to invest for the long-term is a con (in many cases an unintentional one, to be sure).
When some puffed-up Numbers Guy tells you one thing, and your common sense tells you something very different, my advice is to ignore the puffed-up Numbers Guy and put your confidence in your common sense. I like to think that the Financial Freedom Community is going to go down in history as the Toto who pulled back the curtain on the puffed-up Numbers Guys who are behind the conventional investing wisdom of recent decades.
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