Lara Hoffmans
Inconvenient Truths

Chavez, Gore, and a Yale Tenor Walk Into a Bar...

By, 02/16/2007

Good news for Prius-driving San Franciscans. First, an abnormally warm start to winter in NYC proves their pet theory! Second, that altruistic Chavez has declared plans to be president-for-life. Looks like Venezuelan peasants are assured of Cuban-style health care forever! It's like two Christmases around here! Pardon me, I mean two Winter Solstice Celebrations.

Time for Al Gore to fire up his (presumably, carbon neutral) jet for a victory lap. It's a bit awkward that recent temperatures in New York are a bit more February-esque and Denver's(1) been clobbered by two blizzards already, but just a few days of "normal" winter weather are an anomaly. You really have to focus on the abnormally warm December out East to understand how global warming is already impacting us.

"Global warming" enthusiasts and investors have a lot in common—both are prone to confirmation bias. Environmentalists loudly proclaim the catastrophic 2005 hurricane season as hard proof Al Gore is right. But if you suggest the unusually quiet hurricane activity in 2006 is proof Al's movie cured global warming, you're likely to be treated no better than a patriotic Yale student at a San Francisco New Year's Eve Party. They point to a single year supporting their dogma, but your countered single year must be ignored. Seems unfair.

In the same way, this year ushered in the predictable bleating of "So goes January!" By the 10th, the S&P 500 was still in negative territory, and the global market was down 1.2%! The negative start is a reliable indicator of a poor year in the stock market, right? If you point out to your bleating friend he was singing the same tune in 2005, but that year ended positively, he'll roll his eyes and huff, "Come on, you can't look at just one year. You have to look at the longer term trend." Your friend can look at a short, specific, or bizarrely defined time period, but should you try the same to disprove his theory, you're the one who's data mining. It's convenient for your friend.

If you have access to the internet and Excel (or even pages 100 to 102 of Ken Fisher's latest book, The Only Three Questions that Count), you can see this popular bearish shibboleth is not much more than rampant silliness. Why does it survive? Confirmation bias, among other reasons. Adherents cling to those years they clamored "So goes! So goes!" and the year ended negatively, and roll their eyes when the outcome is incompatible.

The so-goes myth is not the only symptom of confirmation bias. Are you worried about stocks this year because of the supposed direction of oil? Are you rejoicing (or fretting) Pelosi and pals' takeover of Congress because one party is better for stocks than the other? Are you cashing out because you're convinced Bernanke will continue tightening, and you should never fight the fed?

If this sounds like you, invest a little time checking if your favorite investing truisms are, in fact, true, or if you aren't being swayed by tradition, bias, or your misguided political bent (whatever it may be). This is question number one from Ken Fisher's aforementioned book: What do I believe that's actually wrong? Running a simple correlation coefficient(2) tells you if your belief has merit, or if it's like global warming induced climactic climate change.

Discovering you've been wrong isn't bad. If you discover something you and most people believe is utter nonsense, you can bet against the masses and win more often than you lose.

And what does all this have to do with President-for-Life Chavez? Nothing, besides confirmation bias plagued San Franciscans thinking he's the cat's pajamas.

(1) Denver's part of that big flat place you fly over.
(2) Learn how on page 11 of self-same book.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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