Saturday, December 04, 2021

Using a Finance Blog to hone your critical thinking skills

The Life-Changing Science of Detecting Bullshit by John Petrocelli is a gem of a book that really does not hesitate to name names and one of the big joys of reading this book is to look at how much bullshit Americans have to live with. Some big names along with concrete examples of their bullshitting include Dr. Mehmet Oz and Deepak Chopra. Naturally, the situation in Singapore is not much better and I find that, after banks can link up CDP to create a 360-degree view of your personal finances, folks like my mum are starting to get more calls inquiring about her investments.    

One useful way of benefitting from this book is to use the appendix of the book that has a comprehensive list of fallacies and try to identify them on finance blog articles to sharpen your own thinking. 

So what I'm going to do is to simply take the latest Money Maverick article and then run through the list of logical fallacies to see where can find some areas where a reader can improve his ability to think critically. Money Maverick was a controversial blog owned by Financial Advisor Luke Ho, but it has since changed hands.

You can go through this exercise yourself by using this link.  

See if you agree with my analysis.

a) Anecdotal Fallacy

An anecdotal fallacy occurs when someone uses anecdotal evidence or vivid examples in his reasoning.

You can find this performance table in this article : 

The thing is that we will see a lot of these results demonstrations on the web, but because Seth can only show off his own portfolio, this is just one data point and does not reflect all of a FA's customers. As it seems to cover just Seth's performance to me, this may well be anecdotal.  

Similarly, we need to be very careful when FAs display the results of their customers. We should not settle if they only get to cherry-pick their top performers. 

b) Hot Hand Fallacy

This is a fallacy where we believe that good things will occur directly following favorable/desirable outcomes. 

From that same snippet, you can find a fairly good return of 36.74%. The Sharpe ratio is off the charts are over 3, but the record only covers one year of performance. To understand what a Sharpe ratio of 3 means, it is actually very sensational, a quant who gets about 0.8 over 10 years is a fairly good investor. This is clearly a one-year hot-hand and the question is whether a Sharpe ratio of 3 can be maintained over time. 

In the investing universe, a one-year record is hardly something to crow about especially when China and US Tech stocks have well but not having a good time lately. 

The problem with asking for a longer track record is that we won't even know who the real owner of the Money Maverick blog is going to be in one or two years' time.

c) False analogy 

When you employ a false analogy, you are using perceived similarities to infer additional similarities that have yet to be observed.

The third fallacy is kinda hard to find given that, frankly, the quality of this article is really poor and the author rambles as he goes on. You need to suffer through the article after which you can scroll down to the section on "Penny-wise, Pound Foolish will not work"

Seth first talks about running his business and why it's not wise to skimp on rewarding good employees. He then tries to take a logical leap to say that, similarly, it is dumb to spend hours looking for the best-fixed deposit for just an extra $75.

If you put on your thinking hat for the moment, you will realize that employee retention and savings deposits are not the same things.

Employees have varying levels of productivity and putting in more rewards can pay off immediately if you consider the cost of employee retention and how difficult it is to get good help in a business. It is also expensive to figure out who a good employee is - you've probably paid sunk costs to do that. You are rewarding them to minimize waste as well. So this kind of good money should be spent.  

A good fixed deposit pays out a higher amount and is an objective measure. There is no reason to take a more expensive option when a cheaper one exists. Also, savings accumulate and compound over time and the final outcome can be quite consequential. How can putting more time to find a better product be considered pound-foolish? 

Readers need to be careful. 

This argument is common in the finance industry that is struggling with high expense ratios and is now faced with cheaper options like robo-advisors and ETFs. The logical defence is to just say that folks trying to cut costs are penny-wise pound foolish. 

In summary, the Singapore financial blogosphere is a great place to practice your critical thinking skills and there are quite a number of blogs that facilitate this kind of practice. Of course, I have only used the book on one sample blog, you are free to even use these tools on any piece of writing including my own. 

I'm not infallible and we can probably learn a thing or two from the exercise. 

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