The Latest Housing Report; The Need for Critical Thinking

I wasn’t going to bother commenting on the recent housing report for a couple of reasons:

1. I would be repeating some of the same comments on housing I’ve been making for the past year.
2. I would be repeating many of the same critiques of the misreporting of economic data that I’ve been making since I started this blog.

To be blunt it isn’t very intellectually stimulating to just freshen up the same analysis you posted a few weeks prior. However I stumbled upon this commentary from TSC’s Marek Fuchs discussing some of the key elements of the bad reporting around the recent housing report, and figured it was worth pointing my readers to since the markets misinterpreted it.

There is also a larger issue here that bears discussion: a key skill people need in order to be successful at managing their own finances, investing, running a business, at their jobs, etc, is to learn how to critically analyze the information they receive. A lot of abysmal if not intellectually dishonest and economic and financial data is released on a daily basis, and it’s important that you’re able to separate the good from the bad and make the right decisions. For instance a lot of investors sent Countrywide’s shares skyrocketing after their Q3 earnings report when the company claimed it would return to profitability in Q4, the thing is there was no logical reason to believe their claim when you consider the negative revenue, rising loan losses, etc. Yet investors fell for it and look at where Countrywide is now.

A less obvious company results example is Circuit City’s recent “profitable” quarter, or the retailer’s whose trumpeted positive results were truly just the beating of lowered expectations that were abysmal on YoY basis. Then you have the markets reacting positively to consumer spending data that is actually rather negative on a YoY basis when you consider inflation.

The list goes on and on and on.

Simply put: a ton of investors are making decisions based on bad economic data, decisions that they’ll eventually pay for. If you want to be successful you need to not only learn how to analyze and critique the information you receive, but understand how the market is likely to misinterpret it as well. The reason for this is twofold:

1. You’ll know the proper investment/trade to make based on the data
2. You’ll also be able to make trades that will take advantage of the decisions made by those who misinterpreted the data.

When I think of the skills one needs to be a successful entrepreneur, investor, etc, I can’t think of one that is more important than critical data analysis. Final thought: are contrarian investors really making money via doing the opposite of the market, or do they just have a better understanding of what is truly going on? In other words are they truly contrarians or are they just making smarter decisions than the masses, and can you truly call it being a contrarian when the masses are just being stupid?

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article..

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