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logo    What Does Investment Advice Amount To?


As a person with a scholarly background, I tend to read almost everything that comes into my hands, and as a person who spent 20 years teaching logic in all its forms (informal, formal, mathematical, propositional, two-valued, three-valued, many-valued, modal, etc.) at a major university, I find much of what I read to be absolute nonsense. Among the pieces that I put into that category are those that provide investment advice, and although I have been tempted to write some investment advisor about these pieces many times, I have always put it off on the belief that it will only fall before blind eyes. But given the economic situation in America today, I've decided to give it a shot.

Although I do not know what the object of advice given in columns such as yours is, I'll assume (kindly) that it is to show people how to save enough during their working years to enable them to maintain their standards of living in their retirement years. (I'll not mention a long list of unkind assumptions.)

When I read these articles a number of things always bothers me.

First is the high reliance of averages. Any reputable elementary statistical textbook will emphasize that the average is not only not a good way to characterize a set of data, it is the worst way. Even a simple median is far better, but far less that adequate. The average, after all, is often a mythical figure which matches no single element in the set. So any conclusions about a data-set based on averages cannot possibly tell anyone anything of importance.

Second is the fact that such pieces rarely define the data-set. Is it the Dow Jones Industrials (a mere 30 companies), the S&P, or something else, like one specifically selected by the writer as, for instance, your large capitalization common stocks. None of these strike me as examples of the kind of random sample any good statistical analysis would require.

So what do we now have? A bad method of analysis based on a biased sample. You want to give advice to people on the basis of that kind of data? If so, you're intellectually dishonest.

Third is the matter of yields. Are these yields in real or inflated dollars? It makes a significant difference. A person who seeks to maintain a certain standard of living must make the calculation on the value of the dollars at the time of his decision to begin investing. And he then calculates what he will need at retirement at the current value of the dollar, not the future value, which he can never know. So even a person who exercises care in his planning is involved in mere guesswork, unless he does the calculation regularly like month by month, quarter by quarter, or whatever, and he has no way of knowing what the optimum recalculation period is.

Fourth is the use of the expression long term. Telling a person that he must view investing over the long term is like telling a person that time heals all wounds. Unfortunately it doesn't stem the bleeding or alleviate the pain. The whole idea of investing for the long term is patent nonsense. No one ever does it. People invest in the hope of having a specific amount of wealth at a specific time, viz., retirement. It's always a set number of years; never an indefinite long term. So what the hell are you guys talking about when you use this expression? What are you peddling?

Consider the article you published in this morning's Dallas Morning News. Look at what you said about the effects on retirees: "If you're already drawing a retirement income, there is a single impact--the effect of your withdrawal rate. The higher the rate, the greater the damage you'll do to your long-term future. (My emphasis.)" What long-term future? The poor guy's already retired! Everything he's done since he began investing to be able to maintain his standard of living when retired, even if he's done all the things right that investment advisors recommend, has failed. The poor guy has been screwed. He missed his goal. He did all of those calculations, made all of those investments, deprived himself of stuff to be able to do so, etc. and came up short.

You and I are obviously different. I would hang my head in shame if I made money off of giving advice to people that often leads to such results.

Now don't get me wrong. I dont object to investing in the market. As a matter of fact, I even do a bit of it. But I know it for what it is. Simple wagering. It's not much different than going to Shreveport or Las Vegas or playing the Texas Lotto. All your advice amounts to is an attempt to find a method, like card counting. People who retired slightly more that a year ago, hit the jackpot. People who need the money today may have picked up a handful of quarters, but not enough to meet their needs. And to now tell them to wait fifteen more years just won't do. Most will, as Keynes pointed out, be dead.

So what is the upshot? I have no objection to investment advise. But it should always be prefaced with the disclaimer that all investing is merely a form of wagering and even if you follow all the best known practices, you may never win. Without this disclaimer, you can easily be accused of trying to pull the wool over peoples' eyes. (Scott Burns 7/10/2005)