The Data Detective: A Narwhal Book Review

This month the team read The Data Detective by Tim Harford, a fascinating examination of the ways statistics are used and how to dig into what they really mean. In a time where "Fake News" and other buzz words surround headlines, it is more important than ever to be able to consider the facts driving the information that we are subject to. Throughout the book, Harford gives examples of how data can be manipulated and how that manipulation can affect the way we as a society form belief around the data. In response to this reality, Harford arms the reader with ten rules that should be considered when determining the validity of data, allowing us as consumers of information to remain unbiased in our quest to stay informed.

Harford’s rules are simple and easy to apply to data that we interact with every day. One of the rules that Harford urges for his readers to use is to always consider the data in context. This could be accomplished by asking the question “what is a big number in the context of this data?” It might seem like a big deal to hear that something is going to cost millions of dollars. If you are talking about a multimillion dollar purchase in the context of buying a starter home, that might be a considerable sum of money, but that same number in the context of spending by the federal government suddenly seems like a much more reasonable expense. Knowing what a number represents and looking at that number in context can help one push past a headline and fully grasp the true impact of a piece of information.

This idea of considering the context of data can be applied seamlessly to portfolio performance. If you see that your account is up twelve percent, you might be pleased with that number. If you dig a little deeper, you might discover that things are far better or possibly worse than you originally expected. If the market returns fifteen percent in a given year, you would be right in being concerned that your account came up short, and if the market was only up eight percent for the same period, you might be even happier with your portfolio manager knowing that they accomplished those returns in an otherwise tough market. Knowing what you are benchmarking and comparing your portfolio to is an important step to bring context to your investment returns in order to achieve a big picture view of your results.

Ideally, we would love for all our clients to learn more and more about their portfolios and feel more prepared to interpret headlines that might impact the market, in addition to understanding what that could mean for their assets. Disciplined investing digs deeper than headlines and is a long-term approach to growing a portfolio. Sticking to the plan allows for more continuity and less stress for the client during rocky times. Another rule Harford advocates for is something he calls “enjoying the view.” Harford claims that, "when media outlets want to grab our attention, they look for stories that are novel and unexpected over a short time horizon – and these stories are more likely to be bad than good." Instead of looking at news through a microscope, step back and investigate the trend. This is an excellent example of why trying to chase the market and why having knee-jerk reactions to scary headlines can create more anxiety and uncertainty around investments. You might get lucky, but over time you are probably setting yourself up for more bad than good, not to mention a lot more stress.

Narwhal’s investment committee is dedicated to looking at things with a long-term approach and eagerly searches for the “why” when it comes to possibly underpriced securities. The vetting process is detailed and consistent when comparing companies in the same industry or simply looking at a company for the first time. When looking at fixed income securities, the bond rating might, on the surface, look like an easy way to rank opportunities. In reality, there can be hidden value in a bond that has a slightly lower rating, but the risk vs. return is lower than it would first appear. Looking deeper at the individual security and comparing things at a base level helps pinpoint new opportunities and filter out those that on the surface look attractive but only go that far.

Harford encourages the reader to “stay curious” and continue to ask questions. Click-bait articles and shocking social media posts are everywhere. If we all took a few extra minutes to do a little digging on our own, it can open a world of new information and teach us to possibly look at a situation from a different viewpoint. Our feelings play a prominent role in how we approach specific topics. The book explains motivated reasoning as “thinking through a topic with the aim, conscious or unconscious, of reaching a particular kind of conclusion.”

We all have biases and experiences that make us who we are and shape our belief systems. It is a beautiful thing and is what gives us new individual opinions and new inventions. It can also make us want to believe something at face value. For example, if there is a down market and headlines scream that a bull market is near, then wishful thinking can make believing that headline easy. There is no motivation to take a few minutes to read why that might be possible or if it is just a sensationalized take on things.

Luckily, Harford points out, "Wishful thinking has limits. The more we get into the habit of counting to three and noticing our knee-jerk reactions, the closer to the truth we are likely to get.” This book reminded us to take a minute and double-check something we are reading. Browsing a headline from a few different new sources can be eye-opening, and after a bit, you can start to see how things might be skewed for a particular audience. We enjoyed The Data Detective and thought that Harford did a great job explaining how to investigate statistics and arrive at a conclusion for yourself. Remember always to ask questions, consider how your feelings are possibly influencing you, and most of all, stay curious!