Wall Street Myths and Truthiness

In an effort to promote more empirical thinking in the blogosphere, one of the main themes here at A Dash is to expose Wall Street myths and “truthiness.” I laid out my major objectives when I began a series on this subject in December 2, 2008.

  1. Identify a widely-held belief or conclusion where supporting evidence is sketchy;
  2. Raise this topic for further discussion and analysis;
  3. Consider what facts, if any, might prove the conclusion to be incorrect.

In A Search for Catalysts (December 3, 2008), I considered a number of widely held beliefs that had the potential to set the market in motion.

  • The SEC report on mark-to-market accounting, due on January 2nd.  This might recommend reporting transparency, but some relief on the official asset calculation.  Or it might not.
  • Housing initiatives.  The Treasury is hinting at a new plan to reduce mortgage rates.  The Fed has already acted.  We expect the market to be skeptical of both, so it may take some real evidence to change opinions.
  • Corporate earnings.  No one will believe anything from Q4, so if there is positive news, we are waiting until April — at least.

 

I have been fighting these myths on Wall Street – especially those related to the BLS and the Birth-Death Adjustment (August 6, 2009) – literally for years. This is just another illustration of how “truthiness” has its way of permeating conventional wisdom.

“As always, our motives are to make the best use of available data.  The multi-year criticism of the BLS and the methodology used has been shown to be incorrect.  Despite this, the myth prevails.  This is due partly to the lack of any mainstream media coverage of the BLS viewpoint.”

Back in April of 2009 I took issue with pundits who felt that the Financial Accounting Standards Board was caving to political pressure on its mark-to-market decision. It was a common case of bureaucracy being drastically oversimplified. As I wrote then:

“Various opponents of change claim that FASB caved in to political pressure.  This is an easy story for journalists to write and for pundits to criticize.  None of them exhibit any understanding of how the American political system works.  They are writing to a receptive audience, which shares their pre-conceptions about how government should work.”

Much of the time mainstream media is largely responsible for spreading these rumors and myths in a misleading fashion. In Popular and Critical Acclaim (June 8, 2009) I quoted an article by Barry Ritholtz in which he suggested a number of ways to improve financial television. He writes:

“Fact Check: An awful lot of things on air get stated with authority and confidence. Much of them are little more than junk or pop myths. Why is it that the more dubious a proposition is, the greater the confidence the speaker seems to muster? Consider fact checking as much of the statements that are made on air as possible, and making frequent corrections.”

At the end of the day, the independent investor simply cannot expect to be successful by following the conventional ‘wisdom.’ Turning a profit means careful analysis from empirical data.

In a piece titled “Information You Need…and Do Not Get!” I explained a few major problems with regular patterns of media consumption.

“I see three problems:

  1. Producers of the big news shows are looking for the dramatic;
  2. Journalists (with a few exceptions) have lost the ability to ask the important questions — the ones that would help investors;
  3. All media sources have been unduly influenced by email and tweets.  These come overwhelmingly from the trading community — and these sources have dogs in this hunt.”