If you cannot pass this investment test, turn over the car keys

Here is a key question for investors and traders alike:  Do you want to be entertained by the colorful opinions of bloggers about what government should do or would you rather profit by understanding what they will do.

Background

We have highlighted the distinction between normative and empirical analysis -- opinions about what ought to be done versus the dispassionate study of behavior.  We suggested in December that the Fed was on a mission, using creative tactics.  We highlighted an excellent article from Abnormal Returns describing the difference between "Positive and Normative Blogospheres."  We have suggested that those offering opinions should first get some information -- at least reading some Fed briefings and old transcripts of meetings.

A Good Explanation

While doing research for our sister site, Election Stocks, where we analyze candidate issues and link them to specific investments, we came across a five-year analysis of the Iraq war.  We recommend checking out our comment on this subject, and the complete study.

Meanwhile, the explanation of the work provides an excellent insight into the distinction between those doing "politics" and those doing public policy analysis.  The report comes from a private sector group.  They make money by providing analysis, not opinion.  The following is the explanation of their mission, taken from the report:

The debate is over whether the invasion was a mistake in the first place, while the divisions over ongoing policy are much less real than apparent.

Stratfor tries not to get involved in this sort of debate. Our role is to try to predict what nations and leaders will do, and to explain their reasoning and the forces that impel them to behave as they do. Many times, this analysis gets confused with advocacy. But our goal actually is to try to understand what is happening, why it is happening and what will happen next. We note the consensus. We neither approve nor disapprove of it as a company. As individuals, we all have opinions. Opinions are cheap and everyone gets to have one for free. But we ask that our staff check them — along with their personal ideologies — at the door. Our opinions focus not on what ought to happen, but rather on what we think will happen — and here we are passionate.

Conclusion

The Stratfor description is exactly what makes public policy analysis valuable.  It is just what we are trying to do at "A Dash."  While we have opinions about what government should do, our mission is in helping investors understand past actions and predict future moves.

Those who do not understand this distinction are failing an investment Breathalyzer test.  They have become intoxicated with the  punditry and the debate over policy while losing focus on the cumulative effect of the many incremental policy changes.  These changes are starting to add up, (yet another future topic.)

Meanwhile, if you do not see the difference in these types of analysis, you should do the following:

Turn over your investment car keys to an index fund manager!

Comments

[VennData]

... or keep them on and and know the Fed'll do the opposite.

[Bill aka NO DooDahs!]

Both normative (analyses they should do) and positive analyses (they probably will do) are useful and enjoyable, PROVIDED THAT they are used properly, and that the reader knows the difference between the two types, and bifurcates their decision-making processes.

For example, the Fed SHOULD disband, and leave their stated functions to the free market. However, I'm not going to base my trading decisions on the probability of them actually doing so ...

There is also the problem of assessing quality levels in positive analysis. For example, if you've been following a popular blogger whose predictions about what the Fed would do have been consistently off the mark, perhaps you should take them off of your RSS reader ...

[Josh Stern]

Speaking of breathalyzers, I found this transcript incredible even by the standards of the U.S. chief executive: http://www.whitehouse.gov/news/releases/2008/03/20080324-4.html

Whether or not he's sauced, he's definitely got some sort cognitive impairment.

[Mike C]

Isn't there room for both? I don't see it as an either/or decision.

As an investor, I want to know what government/agencies/Fed will do so that I can implement the correct investment position.

At the same time, as a citizen with concerns that stretch beyond just seeking investment profits, I do want to read opinionated analysis about what government should do or sometimes more importantly should NOT do, and I don't think there is anything wrong with that.

I absolutely agree that investors need to understand the difference between the two.

As an example, IMO we should be moving aggressively towards nuclear power for electricity generation, but from a practical view I don't see that happening based on current government policy. I see natural gas being a growing power source for electricity generation in the years to come, and am allocated to natural gas E&P names.

When it comes to government and the Fed, their policy decisions have serious consequences, and I think it is a legitimate question (although not actionable to make money) to ask if they are making moves that overstep their authority, and if those moves are being sold as helping "Main Street" when the truth might be the prime beneficiaries are someone else.

[David Merkel]

Well said. It's imperative to distinguish what is likely to happen from what you think should happen if you had the power to make things right.

I've tripped over that, which is why I created systems to limit my decision-making. I make fewer decisions, but I make better ones.

PS -- I have some things to say on last night's piece, but am backed up right now. My quick summary is that I agree with much of what you said, but you may have misinterpreted some of my actions and reasoning. (Which may be my fault...)