IFB73: Wall Street Studies Pitfalls

Welcome to Investing for Beginners podcast, this is episode 73. Tonight Andrew and I are going to talk about Wall Street study pitfalls, this is based on a book that Andrew is a big fan of by James O’Shaughnessy and we’re going to talk a little bit about some of the potential pitfalls that you may run into.
We’re going to start off by talking about data mining and I think the easiest way that I could explain this was a metaphor that James used in the book and he talked about if you’re in Grand Central Station which is obviously a very large place with lots and lots of people around.
If you find a specific area that has let’s say you go into one too but where one of the trains is running and you see 75 percent of the people there are blonde then you would be potentially thinking that hey everybody in Grand Central Station is 75 percent blonde and that’s not actually the case.
It just happens to be at that particular time at that particular place that you find that and so the data mining is something that if you’re doing Studies on different Wall Street things you different factors of looking for let’s say you want to buy stocks on a Wednesday every 16th month well that’s not necessarily that’s data mining because you feel like you have to only buy stocks on a Wednesday on the 16th of the month.
And that’s it could lead to a lot of pitfalls and okay that means dude but I mean.
Andrew: that’s now uh that’s part of I think having tests that look at history you have to be very careful I think when it comes to studies in general and I’m sure you can extrapolate this to things outside of Wall Street and it’s very easy to take facts and weaponize them and make them sound like basically a way to advance your own agenda and you can manipulate statistics to do that.
And so as investors who are looking at studies we like to talk about all the time on this podcast about how let’s learn from history.  History might not repeat it might look different every single time but we know that there are some core things are true history mostly rhymes.
We have bear markets who have bull markets we have prosperity we have times where things tighten up credit expands creditor contracts these are things that we’ve observed over time and it’s recorded in written history. and so we can kind of see that this is how markets tend to work this is how human behavior tends to work and we can come up with a lot of different lessons from how this stuff all kind of works and we can use it in our investing.
Something like data mining though is definitely a huge pitfall to be aware of. like you know I love that Grand Central Station metaphor if I were going let’s say I was a tourist to America and the first tourist thing I did was I went to an NBA game right and then if I just thought that the players on the court were a representative of the entire United States I would think everybody’s above six five.
And you can do that and see that through a lot of different studies when it comes to Wall Street and you have to be really careful and look with a watchful eye. That hey there’s going to be things that you’re going to find out and this is true whether it’s a Wall Street study whether it’s something you’re kind of embarking on your own. And it’s very easy we talked to him a previous episode about biases and how it’s very easy for certain things to kind of skew your understanding of how the market really works based on your own skewed perception.
We all view the world through our own unique lens and so it’s our own experiences and our own things and lessons we’ve learned that is tainting whatever conclusions were coming up with. It’s very important to have a skeptical eye with that and so on the one hand how we always talk about ...