In a fascinating new book, a former Google data scientist offers a whole chapter about his brief misadventures in trying to apply big data — what we know from massive amounts of Internet searches — to investing.
The chapter, part of the book Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are by Seth Stephens-Davidowitz, opens with a meeting between the author and Larry Summers, the well-known economist and former Treasury Secretary under Bill Clinton.
Summers is frighteningly brilliant, the author relates, and after some discussion about big data methods, he gets down to business. Could data be used to beat the stock market?
Maybe, the author postulates. So they try. And they fail, for reasons Stephens-Davidowitz explains. In simple terms, investing is just too complex to narrow down to sentiment gleaned from Google searches, even a lot of them.
Now, another data scientist has come up with an interesting analysis as to why Warren Buffett seems to always win big at investing. Essentially, the data say, it’s because he’s a positive guy.
You’ve probably heard of Buffett’s famously positive outlook. He’s a big booster of American capitalism for one.
As he told investors in Berkshire Hathaway, his holding company: “I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.”
Is it simply a matter of seeing the bright side of things? An analysis of words used by Buffett over four decades of letters to shareholders suggests so, says Michael Toth, a data scientist and former portfolio analyst at BlackRock.
“He uses words like ‘outstanding,’ ‘excellent,’ and ‘extraordinary.’ To me this communicates that he has strong confidence in his optimism, and that he is comfortable committing to and expressing that optimism,” Toth told CNBC. “The negative words he uses, particularly cases like ‘unusual’, and ‘difficult’ seem to refer to challenges and unique circumstances.”
The few times he dipped into negative terms, it was with reason. His less-than-sunny letters tend to appear during recessions. That happened just five times.
As Stephens-Davidowitz would argue, there’s a huge risk in seeing correlation and assuming causation. Just because Buffett talks happy, that doesn’t mean stocks are going to go up.
Rather, stocks go up and it doesn’t surprise Buffett when they do. When the contrary happens — inevitably, the economy slips and stocks fall back — Buffett doesn’t try to dress up bad news as good.
Bad news first
In fact, as he often counsels his own managers, bring the bad news first. He does the same thing when talking to his investors.
All of this neatly lines up with the long-term investment experience. Bull markets last longer than bear markets. Stocks tend to outpace inflation. Prudently invested money compounds.
To reject these ideas as mistaken or naive is to reject the experience of decades upon decades of economic growth. As Buffett told investors in his 2015 letter:
American GDP per capita is now about $56,000. As I mentioned last year that — in real terms — is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well.
If you turn on financial TV news or head to the Internet, the story often is one of uniform disaster. Things could not be worse. It’s all downhill from here. Time to do something drastic.
To which Buffett likely would chuckle and shake his head. Sell your investments if you think it’s the end. But don’t be surprised when the end doesn’t appear on your schedule.