Twofish's Blog

November 22, 2007

I just don’t know

Filed under: Career, china, finance — twofish @ 8:10 am

One thing about economic statistic measures is that once you dig into them, you find out that are extremely messy and complex, and every economic statistic that I can think of has dozens of assumptions and guesses associated with them. This is true for CPI, GDP, PPP, profit, loss, assets, liabilities, export revenues whatever…..

This means that it is very easy to get into a situation in which you pick apart a statistic if it doesn’t agree with you, but you let it stand if it doesn’t. Because every economic statistic is so fuzzy, it’s very easy to find a reason to ignore it if it doesn’t fit your view of the world. It’s also dangerous to do that.

What I try to do is not to rely on specific statistics, but to get as many numbers as I can in order to put together a general picture. It’s harder to fudge 200 numbers than it is one, and one number is just not enough information to figure out what is going on.

Also, it’s useful to just talk to people. Finally, it’s useful to have someone with a different view of how things work look at a number and find out what it means to them. One thing that I find amazing is that a number that is *bad* to one person can be a *good* to someone else.

One thing I like about finance is the brutal honesty that real money forces on you. For example, if I say that the Shanghai stock market is going to crash or the US is going to go into recession, this is perfectly and totally useless for making money. In order to make any real money, I need to say *exactly when* the Shanghai market will crash, and exactly when the US goes into recession, how deep, and how long the recession will be. Once someone makes that predictions, you can see how much they really believe it by seeing how much of their money they put on the prediction.

One of the nice things is that it avoids some of the biases that crop up. People tend to remember the predictions they get right and forget the ones they get wrong, but bank accounts are less forgetful. Also pundits lose nothing for being wrong, but people with real money do. If I knew with certainty which way the SP500 or interest rates would go in the next year, I would be fabulously wealthy, but what leaves me wealthy if I’m right can bankrupt me if I’m wrong. This gives a big incentive to say……

I don’t know………


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