- By: John S. Tobey
- Posted on: 2/13/2014 @ 11:34PM
Here they go again. The self-anointed prophets of doom are trying to scare us as they make a name for themselves. Their egotistical aims are base, their analyses are false and their methods are despicable. Yet, their message of the disaster that will befall nonbelievers inevitably gains new disciples time and again.
Fear mongers know that it’s easier to frighten people than to entice them. Yelling, “Free money!” in a bank causes people to pause and say, “What’s the catch?” Yelling “Fire!” in a theater causes people to scream and panic. Likewise, yelling “1929 is here!” in the stock market ignites fear – plus (and this is the plan), it causes people to beat a path to the guru’s mountaintop, seeking to gain the wisdom that Wall Street and the notorious “They” are hiding from the world.
Cool stuff for a delusional egotist with an arsonist mentality, who seeks flame and fame.
(Stock chart courtesy of StockCharts.com)
So, how do we deal with investment warnings? After all, not all such messages are from charlatans.
First, evaluate who’s saying it. Here is the one time you are free to shoot (well, dismiss) the messenger. Is the observation coming from someone who is knowledgeable, reputable and not prone to seeing every glass half empty? Then, by all means, analyze what is being said. Otherwise, be suspicious and start with the presumption that the message is erroneous or bogus. That applies especially to all dramatic proclamations of inside knowledge, discovered wealth secrets or hidden disasters for the unwary.
A good example of an honest warning is the one from economist Gary Shilling. As I described four years ago in “Out-of-sync, Negative Pundits Are Getting Louder – So, Stay Positive,” I used to follow his work and found it enlightening. However, after the Great Recession, he became convinced that the housing market’s serious troubles were incurable and would drag down the economy and stock market. Clearly (now), he was wrong, but his warning was based on what he felt was proper analysis.
Second, evaluate the analysis, itself. It should be open (i.e., show all the moving parts) and based on facts that are interpreted logically to support a thesis or create a forecast. Often, history comes into play – e.g., to illustrate the current trend or to compare/contrast with a similar or dissimilar period.
The main goal is to ensure that the work is robust and not a statistical trick. Like Mark Twain observed, “Figures don’t lie, but liars figure.” The worst form of faux-analysis is “data mining,” the source of that 1929 chart being circulated. Charlatans turn on their computers and then search for interesting stuff, usually seeking something that correlates with something else. Once they find it, they then try to create a reasonable-sounding rationale to explain it. This backwards analysis is trashed by analysts, academics and scientists everywhere. Everywhere, that is, except in the fear monger’s laboratory.
(Note: In the 1929 chart being passed about, there isn’t even a hint of “reasonable-sounding rationale.” Instead, the chart stands naked, drawn in such a way as to imply, “Look! We’re the same!”)
Third, examine the data and, in particular, how it is presented. The book, “How To Lie with Statistics,” is an excellent primer on the many ways data is skewed to look meaningful when it’s not. While twisted presentations are a favorite ploy of fear mongers, statistical trickery is everywhere, from ads to investigative reporting to political polls etc. – anywhere someone wants to create support for a message.
That circulated 1929 graph is an excellent example in which an illogically chosen time period and two mismatched scales were required to turn dissimilar data into a “surprising” correlation. For more explanation, see “Here’s The Truth About That 1929 Stock Market Crash Chart That Everyone Is Passing Around” and “That Viral Chart Predicting Another 1929 Stock-Market Crash? It’s Absurd.”
Fourth, think about where the message came from – not the original source, but who delivered the bad tidings to you. Often, it’s someone who’s been on the losing side of investing and is trying now to regain a feeling of self worth. Currently, these are either the ones caught by precious metal’s lure & collapse, or those who have held cash awaiting the mega-fear’s vision of economic and financial chaos. The thought that a 1929-style crash is right around the corner puts these investors back in the driver’s seat with a vision of riches earned on the backs of fools accompanied by renown when their wisdom and prudence becomes self-evident.
Note: I know that sounds harsh, but it is human nature at work. The psychology of investors plays a key role in markets, particularly at extreme times. And now is an extreme time for those who have stayed out of the markets, have hung onto precious metals or have beat the drum of “worse to come” for the past five years. They are the big losers, and, rather than rectifying their mistakes, are doubling down on the fear and mayhem bet. (And they would love to have you join them.)
Read more of this article and find other worthy stories at forbes.com
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