Statistically Incorrect

I love statistics!! I really do. But what also makes me nervous is how often people use statistics as their only weapon of argument. Statistics are all too often used to either prove a point, or disprove a point – irregardless of the actual facts. I feel that far too many people in our business are relying, and relaying statistics to further their own agenda without paying attention to the potential outcomes, or even the past outcomes.

Baseball is probably the best sport to use to highlight my point, and I will pick on the NL league especially here. We all know that when the pitcher comes up to bat – usually in the 9th spot, nothing spectacular will happen. We all know that the stats that are put up are likely to underwhelm us. The pitcher usually has 1 RBI, 1 home run, and a .106 batting average. Most people get up to go pee, or channel surf while the pitcher is hitting. Why? Simply because we use past events to predict future outcomes. That is how humans function. We use all of the past to pre determine our present and future. We think we know the outcome.

However, the problem with statistics is that it is simply a group of outcomes over time. The more time we have, the more numbers that go into the recipe. There are entire careers that focus on mathematics, statistics, and telling us the probability that a zebra will land on Mars in a spaceship. However, what statistics don’t do very well is tell us outlier events, or even regularity. Back to baseball. If a pitcher comes up to hit with a .106 batting average, we can reliably predict that almost 9 out of 10 times the batter will not get a hit. However, I cannot predict which time will be the 9 times, and which time will be the 1 time with any more accuracy than you can tell me what color my bedroom wall is painted. The problem with this is that it makes a massive difference to the outcome. Follow me for a moment. If that pitcher came up to bat in the 3rd inning with the bases empty in a scoreless game in the month of May , then it doesn’t really matter about their statistics and when they get a hit or don’t. But, if the game is Game 7 of the World Series in the bottom of the 9th with the bases loaded, 2 outs, then it really matters. If the pitcher had struck out all season long it wouldn’t matter if he got a single that drove in the game winning run and secured the victory. Statistically we would think it couldn’t happen, but there is a 1 in 10 chance that someone with that batting average would be able to poke a single in the hole up the middle and become a legend. When things happen are a lot more important that how likely it is to happen.

I will follow up with a stock market analogy that leads into where we are today. Let’s say 10 years ago I started playing the stock market. Let’s say I placed a $100.00 bet. I lost 5% ( $5.00 ) and sold my position. I did this 10 times in a row and lost ten times in a row, each time selling out when I was down 5% to at least stop the bleeding. You could say simply based on those statistics that on my next bet I was 100% likely to lose, right? Of course. Statistics is simply historical things grouped together. But, let’s say that I thought I learned a lot from my past mistakes, and was feeling very confident. I decided to take $1,000.00 and invest it all in a little known stock called Nvidia. $1,000.00 bet is now worth around $248,000.00.

Looking at the statistics now I lose 10 out of 11 times , so I still lose 90.9% of the time, yet, somehow I now have a quarter of a million dollars. If you take the average gain of all 11 trades I made I lost $5.00 on 10 trades ( -$50.00 ), and made $248,000 on trade 11, so on the whole I gained $ 247,950.00. Divide that by 11 trades ,and I average a gain of $22,540.90 per trade. I am now a rockstar if you use statistics. It gets even better when you say that I ‘invested’ a total of $2,000.00 ( 10 trades at $100.00 each and 1 trade at $1,000.00 ) or an average of $181.82 per trade, and had a return of $22,540.80 per trade, so I averaged a return on investment of about 12,296%. That would put me leagues above every investment manager on the planet. It would also put in rarified air that I did it while losing 90% of the time. Imagine being one of the best in the world at something losing 90% of the time???

Now, I know people are going to rip my examples apart and claim I used a small data point. I sure did. I did it on purpose. I used small sample data on purpose. You see, so many people who think they are all stars or superstars or millionaires, simply are that way because they had a little success – or like me in my example – luck along the way on a couple of data points. How many people do we know, do we have as clients, etc. that got rich quick because they got lucky on one thing – real estate? Real estate defied all the statistics, all the logic, and all of the naysayers for a decade, and made a lot of very rich people. People who now think they are truly great investment managers, and think that they can now win all the time. The reason they did good is simply because they kept increasing their exposure and dollar figure as things went well. What people haven’t seemed to figure it is that it doesn’t matter if you are right or wrong necessarily – it matters how much you risk on that opinion. Initially a client might have owned a small condo, then bought a small single family, and then graduated up to a McMansion. However now they own the McMansion with a shit load of debt, and have 2 rentals, and 3 pre con contracts for 2026. The exposure and risk is beyond comprehension. Being right on a $100.00 bet is a lot different than betting the farm and being wrong on a 10 million dollar bet. Doubling you winnings on a $100.00 bet, is not life changing, whereas losing 15% on a 10 million dollar bet would bankrupt most people.

This is especially important as we see social media blowup with posts about the ‘ easing cycle’ beginning. Is it? Statistically yes, interest rates will start to ease, but what data are those statistics based on? I ask because we have never had this much leverage and debt at stake in a cycle before. We have never had an entire generation that doesn’t know anything but cheap money. We are at a point where people are claiming to be experts on all things mortgage related even though they have only had a license for 2 years. We have an entire country that has built their fortunes on real estate but we simply don’t know if it was because they were good – or because they were lucky. I promise you the next 24 months will bare out the evidence one way or the other. Canada is about to play the largest game of The Emperor’s New Clothes ever.

The thing I find funny about statistics is how easily we will use ones that support our view, and discard statistics that don’t support our view. The early 80’s was a time where we saw high inflation, then it eased, so the central bankers let up on rate hikes, and started rate drops. This sounded great at the time, however within 6 months we were right back into a problem, and Paul Volker at the Federal Reserve had to hike the overnight rate to the point where prime rate was 21.50%. I see a lot more parallels in this cycle with the early 80’s than I do with any other cycle. Not to say it gets repeated of course, but it also means that we aren’t guaranteed to go back to low rates. Statistically we are as likely to see inflation re accelerate as we are to go back to low rates. Again, a lot of our industry is simply using statistics to our advantage and disregarding ones that don’t support our pre determined argument. This is a massive disservice to our customers, our clients, and our profession as a whole.

I am very vocal about where I think things will go. I am often wrong. However, I never go looking for data that confirms what I already think. I look at all data from various people, in varying industries, across all political spectrums. I read things that go against what I think to see if I may be missing something. I consider all views and ideas before I form my opinion – and I never stop. I constantly re assess my stance, and when I think I am wrong, I will change in a heartbeat. This shouldn’t be unique, this should be something we all do all the time. Instead of simply parroting what we hear like ‘ housing to the moon’ and rocket ship emoji’s, why don’t we form an opinion of where we think the market will go, why we think it will go there, and what could cause a variation from that? Why don’t we share true and honest opinions with our clients?

I have always loved when you see things like Royal LePage putting out a report that says they think housing will go up 10%. Well no fucking shit!!! You don’t say!!! I have never read a report from a real estate company that said anything different. Case in point – I have heard a lot of economists and the like speak at mortgage conferences. They always give a pretty bland, dry set of data that suggests that things will be ‘okay’. Then, 2 days later that same person is on BNN saying they think that mortgage originations will drop 15%!! On public TV if they bullshit, they will be called out on their bullshit. Never in a group of mortgage brokers will anyone argue with someone that tells them they are going to be okay. Statistics can change based on the audience you are speaking to, or where you get your data from. Keep that in mind.

Statistics can create a lot of confidence when you give a presentation, show a clearly defined trend, and they can highlight things that you feel are important. However, in today’s day and age those same statistics are just as apt to be used to lead us astray, and give us a false sense of security, and feed into our bias. Always do your diligence – especially when the data is coming from someone who has a vested interest in the outcome. Warren Buffet for years has always reminded people to “never ask a barber if you need a haircut”. In our industry you need to find people who are real, people who are true, and people who don’t bullshit. You may not always like how straightforward they are, but they share what they feel is the truth. Too many people simply choose to disregard things that don’t suit the narrative, and over the coming months, those people will do so at their own peril.

P.S. 92% of people who subscribe to my blog are healthier, wealthier and better looking, according to the author of my blog. Trust me bro, it is a statistic after all.