Never Believe a Fact

Never Believe a Fact.
“When making investment decisions, or when reading news reports on the economy, never believe the facts. Trust no one. Always dig into the numbers until you understand how they were created and what they actually mean. The truth is out there, but so are a lot of lies and balderdash.”

I threw this little teaser up on my Facebook page hoping to start a conversation. It only received one comment and a couple of likes, not one of my more successful posts. However, the solitary comment gave me something to think about, as the statement is simultaneously true and false.

“I doubt the average person has the time or the know-how to dig into it to the degree required.”

Financial “facts” are seldom what they seem on the surface. Take U-3 Unemployment, the statistic reported on the nightly news. It really isn’t a measure of anything but U-3 unemployment. This number excludes anyone who is counted “as not in the workforce.” “Discouraged workers,” who are not actively seeking employment according to the government’s definition are not counted in calculating U-3 unemployment. That excludes over 94,000,000 unemployed Americans out the 243,000,000 that fit the definition of working age adults from the denominator of the unemployment rate. U-3 also counts someone working 3 hours a month selling used furniture on Ebay as “employed,” same as someone working 50 hours a week in a factory. Also there is no mechanism in the calculation of U-3 to prevent accidental double counting of an individual with more than one part time job. To add injury to insult, this number is adjusted on a seasonal basis. This means the statistician making the calculation just changes the result to a number his intuition and experience believes to be a little closer to the truth.

If U-3 is heading down that is good thing unless the number of discouraged workers is increasing faster than the number of jobs. Likewise U-3 headed up is a bad thing unless an increase in the number of unfilled positions is causing more Americans to meet the criteria for actively seeking employment.

There is no accurate measure of unemployment. U-6 is more realistic than U-3, as it accounts for both discouraged workers and part time employees seeking full time positions, but is seldom reported outside of the financial press.

There is no malicious intent in the reporting of these numbers. No grand conspiracy is attempting to hide the truth. The number is even “corrected” months after it is first reported to include more data collected and tabulated after the fact. The Department of Labor statisticians are playing the game by the rules they have been given by our elected officials. As best as I can remember, the last time the definition of U-3 was changed was during the Clinton administration, so what you see in the news isn’t some kind of three shell con-game. However, it isn’t a number that is worth very much.

Trying to find your way in an investment world that includes commission salesmen, who are incentivized by their employer to sell their most profitable products to you, and out-right crooks like Ponzi scheme artist Bernie Madoff is even harder than dealing with an accurate reporting of useless information by government bureaucrats.

Although the average person will never have access to the same information as a billionaire full time investor, the Internet has certainly leveled the playing field. Just opening a brokerage account with a few hundred dollars will give you free access to professionally prepared reports written by experts who do not have a position in the market that would result in a conflict of interest. Websites containing a world of investment information such as the Motley Fool and Seeking Alpha are available to anyone with access to a computer, even if they don’t have a checking account. Visiting Macro-Economic websites, both liberal such as The Big Picture or Calculated Risk or conservative such as those run by David Stockman or Mish Shedlock will teach you what trends are important, how they are calculated, and what the graphs actually mean. It is amazing to me how much information can be obtained with an hour or two spent on line every day.

In the end, it doesn’t matter if you don’t have the time or inclination to dig into mysteries such as the reporting of the American unemployment rate. I have seen relatively uneducated, unsophisticated men and women achieve financial freedom by following a few simple rules.

1) Stay out of debt.
2) Spend less than you earn.
3) Invest what you save in something you understand.

If you can explain what you are doing with your money to a junior high school student, chances are you won’t get into a lot of trouble. If you don’t thoroughly understand an investment, follow my advice, run away.

Remember, you can’t predict the future. No one can. That doesn’t mean you can’t find a path to a better life.

And please, Let’s be careful out there!