It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.
– Albert Einstein (often cited as Make things as simple as possible, but no simpler.)
Recent economic inconveniences are often compared to the Big One of 1929. Buried in the rhetoric are a few other “interesting” times, including the uniquely rapid global hiccup of 19 October 1987. I wasn’t too bothered by the event, having at that point not much in the way of savings at risk, and remaining sanguine in my presumption of opportunities to accumulate more. The most emotionally significant consequence for me may, rather, have been the forced re-examination of what had been a valued over-the-fence relationship.
We all hear and use cliches without reflecting on their literal meaning, until occasionally the denoted event occurs. One January day, slicing into cordwood a heap of snow-covered oaks toppled by a nor’easter, I slipped and landed inelegantly on the ground—fortunately, not holding a live chain saw. First thought: glad no-one witnessed my clumsiness. Second: it really is easy to fall off a log. The day after Black Monday, a neighbor said he’d seen the whole thing coming, and had gotten out of the market by Independence Day. I asked why hadn’t thought to share this insight, especially as discussions of personal investing were a feature of our monthly keg-and-softball block parties. His reply, that he wasn’t a financial advisor and didn’t want responsibility, brought up the plaint that begins with friends like that…
Another mental shift followed reflection on the dynamics of both the 508-point drop and wild fluctuations that followed, including the trading frenzy that locked many small players entirely out of the game for a couple of days. I was in mind of the hoary aphorism that missing only a few of the market’s peak trading days could degrade lifetime gains by a large increment, even a multiplier. Like many naive investors, I had accepted the corollary that staying in long-term is always best. At that point, however, I became curious: not about the specific assertion, but about its inverse. Missing just the few worst days ought to increase long-term gains by a like amount—but, with the “miracle of compounding” usually included in the same spiel, to much greater absolute effect. It seemed to me that drops in the market tend to be more rapid than gains, so trying to time the market by getting out selectively, rather than in, might make sense. In fact, I wondered if there might be an optimum number of periods of random length and frequency to exit the market, reducing the catastrophic losses more than slow gains. (Someone has no doubt modeled and tested this; if it worked; they aren’t saying!)
I reopened the best days/worst days question with financially savvy friends after the 2008 fall was well (or ill) underway. Seems that in the past few years, there has been some cogent writing on the subject, with one author wondering if sales pitches addressing only the upswings might be criminally fraudulent. Nice to find oneself right, though I’d rather be wronger and richer.
I have long held the opinion that if a reasonably intelligent and broadly educated person cannot understand something, then that something either has been poorly explained, or may just not be true. There are many exceptions. Even some of the wizards who invented it found quantum mechanics not only intuitively incomprehensible, but even offensive to grounded sensibilities. There are many famous quotes on this subject. Nonetheless, most people willing to sit calmly and surrender a certain world view for a few moments can grasp some key principles of modern physics at a qualitative, metaphorical level, sans math. But economics, more than most, seems to be a field where great men make definitive assertions supported by detailed logic, none making much sense to many laypeople. An example is permanent deficit spending at the national level, which one hears rationalized in a plethora of ways, few of which seem remotely credible beyond the largest national context, hence perhaps not even there. Perhaps this really is a field that, like quantum mechanics (but unlike evolution or geodesy), cannot be functionally grasped without detailed knowledge of the allegedly operative mathematics, psychohistory, civics, and who-knows-what else. We remain dubious.
One of the key measures by which the American polity assesses its potential for happiness and well-being is the “Industrial Average” of Charles Dow and Edward Jones. Despite the broader reach of other domestic indices, like the NASDAQ Composite, the Russell 2000 and S&P 500, and the existence of diverse international measures, this seems to be the bellwether and gold standard of all such. It is also a wonderfully archetypal example of the pathology sometimes called mononumerosis, the fatuously simplistic attempt to collect a manifold of diverse information (often including dynamic tensors with the scalar quantities) into a single datum. “How are things with you?” “About 18, maybe 19 on Wednesdays.” Absurd, but we don’t see as such the media’s incessant trumpeting of that one figure.
Long before I knew enough to be bothered by such lossy data compression, however, my precisionist sensibilities were rubbed by the fact that it is not an average at all: it is a weighted sum. One might reasonably expect an average to resemble the actual share price of blue-chip stocks on the NYSE. Setting out a measure greater by two orders of magnitude is not only an embarrassingly common example of the American urge toward super-sizing; it also decouples this most visible of indices from a felt sense of how real stocks and real portfolios are doing this month, this year. Most Americans of this decade have more toys than did their grandparents. Perhaps even 100 times more. But they are hardly 100 times better off, healthier or happier—or perhaps our capacity for joy is unbounded, while the hedonic index of life, as with our senses of vision and hearing, smell and taste, self-scales to a humdrum norm.
The main cause of this inflation is the frequent updating of the addenda in this sum. Since the DJ derailed itself in 1896, there has been a several-fold turnover in its constituents as manufacturers of wagon wheels, steam engines, wind-up Victrolas and vacuum tubes failed to adapt and were replaced. With losers constantly culled, this crème de la crème—the fittest of the biggest—diverges ever further from any real unit share price, or most people’s and families’ net worth as gauged in land, larder or leisure. Along with many other economic metrics (GDP and the national debt, e.g.) that have brought extravagant number-names like “trillion” from esoteric nerd-dom into the vernacular (while forcing cartoon characters and some adults into the “zillions”), it also gives a deeply misleading gauge of the true standing of most people and of the nation as a whole. This is especially so when an addiction to quarterly profits undercuts the generation of real wealth and sustainable productivity via progressive improvements in the capability (not just efficiency) of labor and capital plant. And it neatly conceals the way that, like the many and many companies dropped from the DJ30 as their fitness and potency decline, so many working (and post-working and unable-to-find-work) citizens are truly left floundering in the turbulent passage of wealth from up here to up there.
There are other objections to the Dow and constructs like it. Many are quite technical, and perhaps incremental in significance. The difficulty and danger arise not in such arcana, but in the ignorant, hasty or editorially deliberate use of this kind of shorthand as an unqualified substitute for more comprehensive analysis. For example, it was not until nearly the end-of-millennium NASDAQ runup that one finally started hearing financial reporters appending a percentage to the absolutely huge daily swings—many of the order of the 1987 drop, but now on a base four times greater. Meaningful, un-sensational reportage might occasionally assert “with a 100-point rise, stocks today are statistically unchanged” or the like. And the inevitably confident assertion that this rise or that dip is ascribable to those external events is risible. Even the behaviorally recursive artificiality of opening and closing prices—especially given round-the-clock global futures activity—should be warning enough that only some kind of muted rolling mean would be far better, albeit starving adrenalin junkies of their hourly fixes. (The brief survival time of most would-be day traders might be indicative as well.)
If propaganda did not work, people would not use it. An unfounded sense of personal and collective wealth, irrational exuberance and false certainty of long-term success among the masses benefit many service providers and players on the long upswings, and a smaller group all the time: in sum, enough to overcome most attempts at reasoned discourse.
Many previously unsung (or even denigrated) seers were beatified when the mortgage/CDS mayhem, a menagerie of Ponzi schemes and other giga-scale misdeeds began to unwind as the 2008 recession deepened. (A sinking tide bares all the muck?) Very media-friendly, and all merit to those who really tried to sound responsible klaxons against siren songs. What is disturbing is that this always happens—in the NASDAQ crash of 2000, the savings & loan crisis of Reagan’s deregulated 1980s, the Big One in 1929—each was foretold by numerous Cassandras, and each shifted much wealth to a few who (like my erstwhile friend) chose to remain silent. But as with the old “football picks” scam, there are so many people with so many opinions that there will always have been a few geniuses to emerge after any wish-I-could-have-seen-it-coming event. This is not to denigrate those who proved correct, or the power and precision of their theoretical constructs (or gut feel); rather, to suggest that there are a lot of right-thinking people in the world, but that verity is always trumped by sincerity (or charisma or media buying-power) when it comes to before-the-crash steering control. And we know from managed-fund returns that past success is no guarantee at all of future results, or even of keeping par with the commonest denominator of the index fund.
Perhaps the real question here, as ever, is whether we can learn to learn from history, to find ways to manage an information-rich gaming environment in which the risks of individual and institutional greed, criminality or simple error are carried by all (and gains not apportioned so widely) in ways that profoundly threaten society’s presents and prospects. And surely one element of this mastery must be the propagation of tools like simple-but-not-simplistic measures crafted to be as personally as well as globally useful, relevant and transparently constructed as possible.