The Value of Stocks
I've been toying lately with the idea of becoming an economist. It doesn't seem all that hard from what I can tell, and it seems the easiest route to winning a Nobel prize–much easier than, say, physics–since they seem to give them to economists who do the best job of pretending to be a scientist.
The other day I heard the result of some econmic analysis on the radio: some economic indicator (like the consumer-price index) was up. But, so the analysis went, the price increases were very "localized", so that if you subtracted out those things whose price went up, the CPI actually went down!
Clearly this economic analyst doesn't understand statistics, or averages, but believes in the legitimacy of deleting "outliers" (data thought to be "clearly" bad) from a statistical sampling. (This will be part of a future essay on the way statistical sampling works.) Making up bogus data and then making up bogus explanations for it was something I thought I could do pretty well.
It puts me in mind of the anectdote told about Eisenhower (or Truman, or…) who expressed shock when informed that fully half the American people had below-average intelligence! (It's still true, too.)
Anyway, a few days back I was reading about the stock market, and stock valuation, and all the metrics analysts come up with to try to give objective valuations to stock prices. It stuck me that clinging to the notion that stocks even have an objective value is as silly as clinging to the notion, strongly held in the first part of the twentieth century, that the value of money depended on having reserves of gold to back it up.
I guess I'll have to ponder this idea some more and write about it, as I keep promising to do about most fragments of thoughts. In the meantime, if any of us thinks up a way to exploit this realization commercially (i.e., that stocks do not have intrinsic value), let me know.
In: All, It's Only Rocket Science, Notes to Richard