Wednesday, December 31, 2008

Lies, Damn Lies, and Statistics

On Tuesday we learned from the S&P/Case-Shiller Index report that housing prices had declined by 2.2% in the month of October. That was greater than "analysts" had forecast. Hmmmm....

What do you suppose happened to the price of my home in October? Or yours?
I have no idea, because like the overwhelming majority of homes in the country, mine didn't sell last month. It wasn't offered for sale, and I had no intention of selling it. Like most people, I bought my home because I needed a place to live, and it suited my needs and my budget. Some day I'll sell it, and I hope and expect that I'll get a fair price. But why do we need monthly price statistics on something with very low turnover? How does anyone know what the price of my home was in November, or October, or last year? The same is true for art, or wine, or antiques.

We get a myriad of statistics every day. Durable Goods Orders. Producer Price Index. Continuing Unemployment Claims. Merchandise Trade Deficit. Non-Farm Payroll Employment. Sometimes, the reports come from government bureaus, which use them for planning and tracking. But sometimes, they're created by individuals and organizations for publicity purposes (see The Challenger Report of Announced Layoffs) or simply to make a profit. Over a long period, many of the better statistics can help us to understand long-term factors in the economy. But in the short term, they're mostly useless.

However, the media, in its effort to cover the stock market like a sporting event, thrives on statistics. CNBC frequently shows an onscreen bug with the countdown to a report's release (37 minutes to December Retail Sales!). And often a market's move is ascribed to some random event: "Stocks dropped today after traders were disappointed by an unexpectedly large fall in the Empire State Manufacturing Index."

The only statistic that really matters is the one that you see on your stock monitor-- the current quote. A stock, or a barrel of oil, (or your home, for that matter) is worth what someone will pay for it right now. Don't get hung up on statistical analysis; the market price tells you everything you need to know. And if it's an asset that rarely trades and doesn't have a current quote (like your home) don't pay much attention to some theoretical price.

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