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Seasoned Investors: Please Help Me Understand Market Numbers

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April 21, 2009 – Comments (3)

"Baseball fans love numbers.  They love to swirl them around their mouths like Bordeaux wine."  ~Pat Conroy

I grew up on baseball. I've loved numbers since I was a kid. As I've aged (prematurely) I've come to understand that some baseball numbers mean a lot, while others that I grew up analyzing don't mean squadoosh.  I wonder if investing is the same way.

Take batting average (AVG), for example. For the last 150 years, dividing a batter's hits into his attempts has been the most complex analysis you'll find on a batter's ability in a newspaper or magazine. The statistical revolution of sabermetrics has all but erased batting average from the consideration of baseball executives and serious fans. It hasn't however, had any effect on the media pundits, experts, and casual observers who breathlessly follow the batting average race for six months.  

Are there any investment numbers that are considered hallmarks, followed and promoted by the media, their cadre of experts, and casual observers that actually have no meaning or relation to the company's worth? 

Other baseball numbers are useful only when used in context, for example, the stolen base.  Stealing bases is an important aspect of the game, but the statistical revolution has shown that a success rate of steals less than about 70% actually reduces the team's scoring capacity over the long run.  It turns out, stealing bases has little impact on a team's overall run production, but can produce a maximum impact if used properly by an astute manager. 

Are there any numbers that are widely misunderstood by the investment community because they are applied too broadly even though they are only useful in a certain context?

One of the most interesting aspects of the game is the wide disparity in the configuration of parks for each team.  Some parks drastically reduce runs scored due to size, weather effects, and sight lines while others, most famously Coors Field in Denver, can make an average hitter look like Ted Williams.   Even when fans and experts are aware of the park's effects, they have trouble placing a valuation on it or properly discounting the park's effects on a player's performance even when that statistical information is readily available.

Are there any factors in investing that consistently impact a stock whose effects are often underappreciated even though that information is readily available to everyone?

Baseball statheads have a number they've fallen in love with. It's called Win Shares. It was invented by sabermetric legend Bill James in the 1980s and it's still largely unknown in the baseball community. It is an excellent descriptive summary statistic that calculates a player's overall value.  It's a bit complicated but does a great job of correlating a player's performance to how many games a team wins. After all, winning is the bottom line. 

Are there any statistics in the investment community that do an excellent job of summarizing a company's bottom line performance that the majority of people have never even heard of?

There is an institutional bias in the baseball community towards certain numbers.  Pitchers are judged by Wins and Saves, which are largely factors of the players around them.  Hitters are judged by Runs Scored and Runs Batted In even though it's evident that you can't drive in runners if nobody is on base.  Pundits focus on those numbers at a ridiculously disproportionate level.  Even significant offseason awards like the MVP and Cy Young Awards are often decided by these arbitrary measures, and these are awards are voted on by the supposed experts of the field.  This bias is self perpetuating, forcing pundits to keep a close on this often worthless information, captivating the casual observer for months.

Are there any numbers in investing that have an institutional bias, are promoted by people within the industry, but have little to no relation to the overall performance of the company?

I could probably go on and on with these types of analogies but I'll stop here.  Please add any insights you have.  I would greatly appreciate it.  I'm here to learn about investing, and unfortunately, I don't have much experience in it.  (That's why I don't blog "stock advice." I have none to give.)

If there are any other useful numbers that you can share with me that don't fall under the questions I've listed, I hope you'll share those as well.

David in Qatar

3 Comments – Post Your Own

#1) On April 21, 2009 at 10:52 PM, starbucks4ever (98.50) wrote:

Are there any investment numbers that are considered hallmarks, followed and promoted by the media, their cadre of experts, and casual observers that actually have no meaning or relation to the company's worth? 

PE ratio 

Are there any numbers that are widely misunderstood by the investment community because they are applied too broadly even though they are only useful in a certain context?

ROE, when "R" stands for last year's income  

Are there any factors in investing that consistently impact a stock whose effects are often underappreciated even though that information is readily available to everyone?

CEO's penchant for fancy office space 

"Are there any statistics in the investment community that do an excellent job of summarizing a company's bottom line performance that the majority of people have never even heard of?"

See above.

Are there any numbers in investing that have an institutional bias, are promoted by people within the industry, but have little to no relation to the overall performance of the company? 

Share buybacks. 

 

 

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#2) On April 21, 2009 at 11:40 PM, foolsMeThrice (99.64) wrote:

Rule #1: one you must think for yourself.

Rule #2: if you can't follow rule number one, then copy the caps players ranked in the top 40.

have fun :-).

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#3) On April 22, 2009 at 12:21 AM, motleyanimal (85.87) wrote:

You grab your ergonomic potato peeler and swing it over your head like a drunken Cossack, then mount your riding mower, and go charging through the neighborhood like Taras Bulba.

In time, the disability checks will arrive and you will have won.

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