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Ask the advisor: Alternative facts - dangerous in investing

February 17, 2017
Jonathan Lokken SUBMITTED PHOTO

Recently, one of President Trump's advisors caused a media storm when she suggested that the White House was using "alternative facts" in determining the size of the crowd for the recent inauguration. To be fair, what she seemed to imply is that there were no facts at all related to the crowd size, only subjective analysis. As there is no official record of crowd size for the inauguration, and no way to actually count those in attendance, one is left with a visual "guesstimate" of attendees. Rather than "alternative facts," she could have more accurately said there were competing "guesstimates."

Another word for "guesstimates" is opinions, and in politics, often opinions all are that is needed to sway voters one way or another. Your political persuasion alone, perhaps, is enough to determine whose opinion you are likely to accept as factual and which opinion you will reject as a falsehood. In my view, it seems an incredibly small amount of political discourse is based on fact - it is almost all opinions.

In investing, however, using opinions and guesstimates in your analysis can be particularly detrimental to your long-term success. As Warren Buffett has famously described, in the short term, the market is like a popularity contest. It sways this direction and that direction based on what is popular today or what opinion market participants happen to believe this month. Trying to guess the short-term direction of the stock market is like trying to guess fashion trends. There's not a lot of factual analysis going on.

But in the long term, the market is a weighing machine, and its ultimate direction is likely to be determined by cold, hard facts. The good news is that there is a lot of factual information on which to base your investing analysis, and most of it is easily obtained. This is otherwise known as data, and you can find it through the internet or at your public library. I find data such as the leading economic indicators, current inflation, the spread between short-term and long-term interest rates, and year-over-year change in corporate earnings particularly valuable in making investing decisions.

However, there is a ton of economic data available to investors, and what is key, in my view, is to focus on the data most important to you and your analysis, and to monitor the change in the data on a monthly basis. Create a spreadsheet, or simply note the data in a notebook. Over time, the change in the data will reveal trends, and these trends will ultimately create actionable investment ideas. By making this small but important step, you will become a fact-based investor and be less likely to fall prey to investment decisions based on subjective opinion.

The bad news is that this takes some effort. Not necessarily effort that will overwhelm an average investor, but it will take a certain amount of time and energy. Therefore, many investors, instead of expending the energy needed to be fact-based investors, will instead rely on media commentary. Daily we are barraged with media commentary, much of it subjective and based on opinion and very little fact. Often, that commentary is tinged with a political viewpoint as well, making the opinion particularly attractive to those who share that point of view.

I find much of this commentary speculative and not terribly valuable. Is it "fake news" or factual? Increasingly, it's hard to tell.

But, of course, don't take my word for it! After all, I, too, am a commentator and simply sharing my opinion. Find the data for yourself and become a fact-based investor, not an emotionally based guesser.

Jonathan Lokken, CIMA, is managing principal of Lokken Investment Group LLC in Lewes. He has been professionally managing client investments since 1997. For more information, go to www.lokkeninvest.com or call 302-645-6650.

Disclaimer: The foregoing content reflects the opinions of Lokken Investment Group LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss.