Statistics Can Be Fun – And Profitable

Wednesday, January 20, 2010

01-20 1025342_learn_srb_2-200Statistics fun? Well, yes, if they are profitable – and they can be. In investing it isn’t just wise statistical analysis that can make money – it is also the spotting of misapplied statistics by others. The frequency with which this happens is high enough to make it an important strategy for contrarian investing. Here is what I mean…

Investment statistics and statistical analyses are everywhere. From finance and accounting to investment ratios and growth rates to risk and diversification to yields and returns to strategy and outlook to fun facts like January effect and summer rally.

The perhaps surprising fact is that they often are mistakenly or intentionally misused. Or they are given far too much weight and importance – relying too much on numbers rather than judgment.

This is not a new occurrence. Over the decades, many books have been written about the problem. (For example, the 1954 book, How To Lie with Statistics, by Darrell Huff.) The focus is typically how to avoid getting misled. But there is another side – using the bad statistics to make a profit.

Spotting incorrect statistical conclusions that have become popular is a great strategy for contrarian investing. It represents spotting a fad or fear based on bad analysis. An example today is the too-high price/earnings ratios being bandied about for US stock market indexes – a subject I covered earlier. The incorrectly calculated ratios are keeping people away from US stocks – hence, stock valuations are attractive, creating a buying opportunity.

This subject is so important, I am going to present an example tomorrow to show how prevalent bad statistics usage is.

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John Tobey on Seeking Alpha

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January 2010