There are key investment lessons to learn from reportage on airlines

Air travel is the safest form of travelling. But it doesn’t seem to be so, at least not in our heads. The question is, why? The answer is very simple. The media reports every air crash. But it never reports all the safe landings at airstrips happening every minute across the world.

As Tom Chivers and David Chivers write in How to Read Numbers – A Guide to Statistics in the News: “Newspapers print stories about air crashes, which are novel and exciting and rare, rather than stories about planes that land safely, which is boring and common; so the public conversation… fills up with a skewed picture of how… dangerous things are.”

Interestingly, the data on this presents a very clear picture— airlines are a very safe form of travelling, irrespective of what we think.

As Hans Rosling, Ola Rosling and Anna Rosling Rönnlund write in Factfulness:Ten Reasons We’re Wrong About the World—and Why Things Are Better Than You Think: “In 2016, a total of 40 million commercial passenger flights landed safely at their destinations. Only ten ended in fatal accidents. Of course, those were the ones the journalists wrote about: 0.000025 per cent of the total. Safe flights are not newsworthy.”

The newsworthiness of air crashes makes air travel feel to be much more dangerous than it is. Interestingly, from this insight we can draw a very important investing lesson.

Over the past few years, there has been a rise in social media driven investing. Many individuals and investment management firms have been offering investment products and strategies by advertising them or communicating about them through the social media.

An important part of this communication is to tell prospective investors that the investment strategies or investment algorithms followed have generated very high returns in the past. And given that they are likely to continue generating high returns in the days to come as well. As a part of this strategy, back-tested data showing high returns is shared with investors. What this means is that in the past if this strategy had been followed, high returns could have been possibly generated.

This is where things can get tricky. The trouble with numbers is that if you torture them enough, they will admit to what you want them to say. These back-tested investment strategies or algorithms are a tad like that.

If you try out enough number of strategies or algorithms based on the past data, some will end up showing that a very high return could have been possibly generated. You can then choose a few such strategies and communicate/advertise them to prospective investors through social media.

This is precisely how things go when it comes to reporting on airline landings. Given that only crashes get reported on, one ends up feeling that air travel is risky. Similarly, when only back-tested strategies that work are advertised or communicated over social media, prospective investors end up feeling that these strategies will work in the future as well. Like airline landings, thanks to the way communication is happening, they don’t have the complete picture in their heads.

The strategy that is supposed to work is one of the many on which data has been back-tested. Of course, the investors don’t know this. Hence, they get a skewed insight on this.

They usually find out after handing over their hard-earned money to such money managers that things don’t turn out to be like the back-tested investment strategy seems to have suggested.

This is not to even remotely say that algorithm/quant investment strategies don’t work. But try and think about it, if someone has got a quant-based strategy that is working in real time, will they try and make more money out of it for themselves, or will they try sharing that strategy in the public domain, get prospective investors to invest money with them and then try making money out of managing money. This is a very essential point that investors need to keep in mind.

Vivek Kaul is the author of Bad Money.

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