5i Research Blog
Jan 18, 2017 Tactics to Watch for When Reading Financial and Investment Content
*Don't miss Peter Hodson on BNN Market Call today (January 18) at 1PM EST.*
Reading finance and investment content can be fun, interesting, educational to read and sometimes can even be a profitable read. There is no doubt a great deal of content out there for readers to consume. Some of it can be very biased while some of it can be quite balanced. Across a lot of financial writing, there are some common practices that we see that offer interesting food for thought or a unique point of view but may also be a bit misleading. Here are some tactics we often see that may be interesting, but misleading if taken out of context.
Overlay of charts from different time periods
Readers of financial content will see this A LOT. A writer or analyst will put up a chart from different time frames and draw some sort of conclusion on the current environment based on the previous. Currently, we are seeing comparisons of markets when Reagan was President to Trump winning the Presidency. Parallels no doubt make for interesting reading but should probably stop at ‘interesting reading’ and not make any sort of impact on actual investment strategies. Key facts such as Reagan taking office when 10-year interest rates were in the double digits vs. at record lows with Trump make any comparisons difficult. These details are often omitted in favour of 'cool' looking charts. Readers will often see this when comparing bull markets as well. Again, it is interesting and does help to give an idea of average bull market durations, but todays bull market certainly does not care how long or why previous ones lasted.
Back testing references
Back testing is when one looks at the performance of stocks, funds or certain factors in the past. The past performance of the handful of factors is then used to justify the merits of an investment strategy. Back testing is important, as no one would want to invest in a strategy that has never worked in the past, but that is also a bit of the point: No one is going to show a back test that does not provide solid results over the historical time period chosen. If certain factors do not show strong returns, either a factor or the time frame would be tweaked. Add in the typical caveat that past performance does not indicate future return potential and one can quickly see how the citation of back tested results is really more for interesting reading than of a whole lot of value. Yes, you would want to ensure a strategy worked in the past but if a fund shows you that it has never worked in the past, then what exactly are they trying to sell you!
This can tie in a bit with the idea of back testing. Financial content can be creative with time frames. Don’t like your year to date results? Try the last twelve months. Still doesn’t show what you want, look at three, five or ten year periods. Maybe a three or six month timeframe helps. The point is that market moves can be random in shorter periods and this can help or hinder a point someone is trying to make. For every number of time frames a strategy outperformed a benchmark, there are likely an equal number of time frames it matched or underperformed. It is important to remember that the best foot is being put forward when time frames are chosen. The time frames presented are likely far less arbitrary or benign than they may seem.
Guarantees and promises in financial writing are actually quite rare to see and this is a good thing. It is worth noting though that if someone is promising a certain return or performance, to be very wary. The only certainty with investing is that of uncertainty.
There are numerous tactics that can be used in financial writing to ensure the piece is put in the best light. If read with a critical eye, most of it is harmless but always ensure you are performing your own due diligence and analysis before taking someone’s written word for it.
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