Just the Facts

A Factfulness Review

One of my favorite books from last year is called “Factfulness, Ten Reasons We’re Wrong About the World – and Why Things Are Better Than You Think.” In it, the late Hans Rosling writes “this book is my last battle to fight devastating ignorance.”

Rosling uses global facts as the basis for determining how – unless we rely on good data — we will continue to have an inaccurate view of the world. Many of our common beliefs are formed not by doing primary research, but relying on hearsay, popular culture, and, of course, the media.

Case in point: in the book’s introduction, we are given a test of our knowledge about the world as we know it. Question One: “In all low-income countries across the world today, how many girls finish primary school? Is it A: 20%, B: 40%, or C: 60%?” Question Two: “In the last 20 years, the proportion of the world population living in extreme poverty has A: almost doubled, B: remained about the same; or C: almost halved?”

In both cases the answer is “C.”

Good News is Not News

There are a variety of reasons why you are likely surprised by the answers. Rosling gives a number of them, and I think many of these reasons can be applied to investing. For example, why is it that investors armed with more availability of data than any time in history, continue to make poor investment decisions?

One key reason Rosling gives for peoples’ lack of “factfulness” is that information about negative events reaches us much more frequently than positive news. When things are better, we tend not to hear about them. When was the last time you read about a jetliner landing safely or a company CEO being nice to his team? We are much more sensitized to plane crashes and ill-behaving corporate leaders. He calls this the “negativity instinct” and provides a few ways to combat it.

Bad or Better?

Practice distinguishing between a level (such as “bad”) and a direction of change (“better”). Things can be both better and bad. As the subprime mortgage crisis spread around the globe, just as conditions were worsening in Europe and Japan, they were starting to improve in the US. Although investors had been burned by a devastating collapse of the S+P 500 in late 2007 and much of 2008, the index bottomed in March of 2009. Those who were spooked about buying back into the S+P then may have been negatively influenced by the crisis getting incrementally worse outside the US. In hindsight, that was the best time to buy. In other words, things were both better and bad.

Where's the Smog?

Another way you can control the negativity instinct is to understand that gradual improvement is not news. When a trend is gradually improving, we are much more likely to notice the periodic dips rather than the long-term overall improvement. Growing up in the Los Angeles area, I still think of the many days I came in from recess with burning lungs because of the ever-present smog. Decades later, I’m amazed at the drastic improvement in air quality in the LA Basin due to the positive long-term impact of unleaded gasoline, more fuel-efficient vehicles, and stricter manufacturing regulations. Yet I still cite LA’s lousy air quality as one of the reasons for my decision to move to Idaho 25 years ago.

Don't Stop Learning

One of the most important conclusions in “Factfulness” is that the world will keep changing and we must update our knowledge and world-view accordingly. Similarly, investing and markets keep changing. As examples, we need to consider and analyze the impacts of market structure, high-velocity algorithmic trading, and corporate financial disclosure regulations when making investment decisions.

Lacking hard quantitative facts, many investors will continue to have a distorted view of the world. Through our careful application of the same fact-based discipline to investing, we hope to improve our investment outcomes. If your investment decision-making process is currently fraught with the negativity instinct, let’s start a conversation.