Important Investment Story, Missed by Nearly Everyone

Attention investors!  Most market studies are either misleading or completely false.

The research you see on the Internet or on financial TV is done with a purpose in mind.  It is not reviewed by anyone, and it involves many methodological flaws.  Often the point is to sell fear, gold, or structured products with high commissions.

This is an important story, but few will pay any attention.  It is so easy to deceive by drawing a line on a chart.....

Actionable Investment Advice

Every online new source emphasizes "actionable investment advice."  Publication by popularity means that authors are encouraged to tell readers what they want to hear.  People seek reinforcement, not challenge.  Authors want readership.

Seeking Alpha's new ranking and payment policies provide authors with a lot of information about popularity and page views.  While I have a strong ranking in various categories, the readership for some of my best and most important articles is pretty disappointing.  I do not blame this on SA, where I have had a good partnership, and wonderful support from their team.  It is simply the nature of the audience.  There seems to be a strong appetite for stock tips that will be "instant winners" and negative commentary on the market, the Fed, and Obama.  I could hit the popularity highlights tomorrow with an article about why this is a "sucker's rally," and explaining that you should be happy that you missed out since it shows how smart you are.  Instead, I am going against the flow.

In sharp contrast to the SA audience,  I was delighted to learn that my contributions to Advisor Perspectives earned one of their Venerated Voices awards.  Even though I contributed only a few pieces during the year, the popularity in this audience placed me as #13 in their list.   It is a very impressive publication and the readership is sophisticated.

Encouraged by this, and by reader comments, I plan to continue to provide stories that show why the individual investor is being deceived.  To me, this seems "actionable."  It is possible, quite possible, that the most important messages for investors may not lead to a specific trade at that very moment.

Investors should budget a few minutes each week to their education.

A decision for every blogger is what to write about.  I have about forty stories on my current blog agenda.  Each day I weigh what is most topical, most valuable, and also what interests me at the moment:)

The triggers for today's article are my ongoing battle against deceptive research and this weekend's Super Bowl.

The Big Story

The November 2010 issue of The Atlantic included a powerful article by David Freedman analyzing medical research.  The summary of the article is as follows:

Much of what medical researchers conclude in their studies is misleading, exaggerated, or flat-out wrong. So why are doctors—to a striking extent—still drawing upon misinformation in their everyday practice? Dr. John Ioannidis has spent his career challenging his peers by exposing their bad science.

The bad research occurs in spite of powerful incentives.  Doctors want the right information about treatments and drugs.  One would expect that journals, editors, and reviewers would all have reputational risk if they made poor evaluations.

The Kauffman Foundation's Dane Stangler wrote an important article on this topic.  Here is his lead:

Immediately drop everything you are doing and read this article. Then, shove aside the growing pile of books on your nightstand and read this book this weekend (doing so will also deflate any tension with your spouse over the appearance of your nightstand). Discussion questions:

Read the entire article to see the suggested questions and additional links, but I liked #2: "Where is the John Ioannidis of economics or social science more broadly?"

I try to do this, and so do a very few others.  There are no monetary or commercial incentives for challenging or reviewing anyone's work on the Internet.  This helps to explain why so much questionable work is unchallenged.

Arnold Kling, another of my regular reads, has some great excerpts from the article, although he also encourages us to take the time to read it all.

The Super Bowl Indicator

In my weekly market preview last weekend I mentioned the most widely noted piece of bogus research about stocks, the Super Bowl Indicator.  Having taken the weekend off I had not caught up on my WSJ reading or I would have seen Jason Zweig's excellent article on the history of the Super Bowl Indicator.  Those who have read his work for many years have come to expect both insight and clear explanations.  The article is delightful, as are the links that he cites.  This is a great story about how something started as a joke gained some credibility.

In his wonderful book explaining the neuroscience behind behavioral economics, Zweig covers one of my favorite topics:  correlation and causation.  I love the example of improving a stock market model by adding a variable about changes in the US sheep population.

Putting it All Together

If Stangler, Zweig, Kling, and the Kauffman Foundation are really serious about improving economic research, the gloves must come off.

I submit that most of the research analysis and commentary on global macro topics and stock market forecasts is misleading or incorrect.  Most criticisms of official data are incorrect, skewed to tell readers what they want to hear.

Most of the ominous indicators about the market, the seasonal warnings, and the "worst times to invest" articles were done using the exact same method developed by the inventor of the Super Bowl Indicator:

Start with the conclusion -- then find some explanatory variables.

I write about this all of the time, but there is not much interest.  Two articles of modest popularity were my analysis of the Hindenburg Omen and my pointer to objectivity in technical analysis.  I wish more people had read these in real time -- late August, early September, and late September from Charles Kirk.  In retrospect it seems "actionable."

And by the way, here at "A Dash" we are cheering for the Pack, partly because Mrs. OldProf grew up in Green Bay.  We are comforted in knowing that the Super Bowl indicator suggests a bull market no matter who wins.

Comments

[Paul]

Just found your blog and had to tell you how much I like it and what a great post this was.

I've pared down the blogs and forums I visit now to just a couple, just added yours though. :)

FWIW, I've always found SA a bit off. The writers with the most followers and the most comments didn't seem like they had any substance to me, so I very rarely visit there.
Too many gold bugs after gold runs up etc.

[Ernie]

Jeff, you are top shelf, very sharp and highly respected. Unlike with many others whose blogs/articles I've read, I never ever have gotten a feeling that you were doing anything but educating your audience with purely unselfish motives. Please keep helping us retail trader/investors, because it seems 'everyone' else is out to pick our pockets.

[lou]

Jeff,

"people seek re-inforcement, not challenge". No truer words were ever spoken.
As a long time reader, I have to say, I think your writings are "top of the box".

[Jim G]

Dr. Jeff -
for better or for worse, the rise of the internet has given every tom, dick, and harry a forum for posting whatever nonsense pops in their head. As I commented a couple of weeks ago, much of what is on SA must be taken with a big grain of salt. The first thing I do when I look at a post on SA is look at the writers credentials. Honestly, my eighth grade daughter is more qualified than most. What differentiates your posts is that they always add value, and have something important to say. Thank you for improving my education as an investor. And I hope you will keep posting for a long time. Thanks, Jim

[Leo]

Hi Jeff,
I comment only occasionally, but I read your articles constantly.
Please don't feel discouraged by the size of your audience. I greatly appreciate your work.
And here's a nice anecdote: I was in Israel a couple of weeks ago, and a conversation with a colleague turned to the stock market. We shared our favorite sources, and the first blog he mentioned was yours! So you have a readership even across the ocean.

[jdb]

Jeff,

I do hope you will continue with this category of articles. It is possible, with help, to understand the shaping that is being thrown at us by financial media. It's hard to accept the truth as to how much coming at us is false. But, once you work through this and know the whys of the matter, it provides a great deal of comfort and confidence that one can invest wisely. In fact, all the false information becomes the matrix of success and it doesn't seem to take a rocket scientist to be a good investor. First of all, it just helps one keep our nerve in a chaotic mess of information.