Automobile Deaths and the How to be a Losing Investor

Saturday, January 8, 2011

After Seeking Alpha selected my article, “New EPA Mileage Standards Could Stimulate Auto Sales,” an investor made the following comment:

“Every time CAFE [Corporate Average Fuel Economy] standards rise, the total number of deaths from car accidents rises (lighter cars means less survivability).”

The statement is incorrect, as I show below. More importantly, this comment is a good example of two common investing mistakes:

  1. Letting personal feelings (in this case, about politics) color investment judgment
  2. Relying on erroneous or simplistic “facts”

Throughout my career I have seen and heard investors use personal beliefs as a reason to own or not own something. Doing so might make the person feel good, but to succeed an investor needs to remain objective. Leave feelings for dinner conversations.

Now, about that comment above. There are three major problems:

First, EPA mileage standards correlate with lower total automobile deaths

The following graph shows a decline, not a rise, in total automobile deaths, now back to 1950’s level. Moreover, because the annual miles driven have risen significantly, the more appropriate statistic is deaths per 100 million miles driven. That measure has fallen consistently to new lows.

Second, looking at the correlation of two items does not necessarily make a sound conclusion

Many automobile changes have occurred over the past 30+ years besides the EPA’s mileage standards. Automobile designs, seat belts, airbags, speed limits, highway construction, traffic cameras, safety campaigns, etc. have undoubtedly had a significant effect – probably moreso.

Third, automobile deaths are an unrelated measure to the original proposition

A debating strategy is to ignore the issue and change the subject. The comment above follows that approach by discussing the EPA’s standards effect on deaths rather than on sales.

So… To be successful, we need to remain objective when making investment decisions, even when we might have strong personal convictions. And this means neither allowing our feelings to color the analysis nor relying on unsupported or simplistic “facts” that happen to match our beliefs.

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John Tobey on Seeking Alpha

Seeking Alpha Certified

January 2011