Fun With Numbers: Stagnation, Stat-Skewing, and Baseball Bias

Random thoughts on the VXX, investing stats, and biased baseball figures

Adam Warner
Aug 6, 2015 at 6:46 AM
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I'm kind of not here this week; many thanks for keeping everything kind of where I left it. By the way, I'm shocked (shocked!) that we've spent a few days churning to nowhere. 

If anyone ever asks you "Where's the market going to be 'X' days from now?", a safe answer is "Right about where you see it now … Oh, and the iPath S&P 500 VIX Short-Term Futures ETN (VXX) will make new all-time lows." 

Here are a couple of random thoughts until we meet again next week.

First I bring you Vanguard Group founder John Bogle and his never-ending quest to get everyone to Stop Trading! From MarketWatch:

"An astonishing $32 trillion in securities changes hands every year with no net positive impact for investors, charges Vanguard Group Founder John Bogle. 

Meanwhile, corporate finance -- the reason Wall Street exists -- is just a tiny slice of the total business. The nation's big investment banks probably could work for less than a week and take the rest of the year off with no real effect on the economy. 

'The job of finance is to provide capital to companies. We do it to the tune of $250 billion a year in IPOs and secondary offerings,' Bogle told Time in an interview.

'What else do we do? We encourage investors to trade about $32 trillion a year. So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middleman. It's a waste of resources.'" 

That's an eye-popping number, $32 trillion. I assume it's correct; I have no idea. But that's really misleading. 

In 2015, a very large chunk of that is Machine A trading with Machine B at very minuscule transaction cost. Of that $32 trillion, what percent really goes to a middleman -- 0.1%? Or 0.01%? I'm not real sure, but in this day and age, it's not enormous. Relatively few dollars are traded in a public Schwab account. 

On the other hand, I don't really disagree with his whole premise -- I just don't believe it requires sensational numbers that really just mislead. How about just pointing out that scant few can outperform an indexing approach over time?

OK, in all fairness, he does usually do that, and it's here, too -- it's just buried way below the lead.  So maybe he just wants a more emphatic way to make his point. Unfortunately, he's still not the best party in the room to make the point, considering his name is synonymous with Vanguard and their 10,000 index products.

Speaking of misleading numbers … Did you ever go to a baseball game and see the batter up and the scoreboard tells you he's batting, like, .350 in his last eight games, or has gotten hits in 22 of his last 28 games? Something like that?

I know it's a nonsense point, but it always drives me nuts. So I wanted to have a little fun with a Poisson calculator (and yes, that's not something that's all that fun). 

Anyways, the first part is kind of obvious. If you let anyone select endpoints, they can probably prove anything, be it their stock-picking prowess or their amazing ability to pick football games (eight winners in the last 11 picks, amazing! just don't look at the 30 picks before that). Not to mention there's some survivorship bias thrown in. The guy in a 2-for-38 slump probably isn't in the lineup -- or on the team, for matter. 

And the second random thought? Well, that's really fun with numbers. I'll use New York Yankee Jacoby Ellsbury as an example. He's batting .283 and gets about four ABs per game. What are the odds he gets at least one hit in a given game? 

Would you believe 68%? Sounds high, but throw it in a Poisson calculator and that's what you get. Even a .250 hitter will get at least a hit in about 63% of all games. 

So, basically, in any random 30-game sample, a good-but-not-great batting average guy like Ellsbury, who is near the top of the order and doesn't get pinch hit for, will get hits in about 21 or 22 of those games. If he has hits in 25 of them, he's really only slightly hot. 

And that concludes our segment of Fun With Numbers. Now, enjoy the game!

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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