Lying With Numbers
Why do smart people make dumb investments? In my experience, it almost always traces back to a misunderstanding of numbers, track records, fees, risk probabilities, etc.
Numbers don’t lie, but you can lie with numbers. It’s possible to twist even accurate figures in all kinds of misleading ways. It’s therefore important to dig a bit deeper into the “facts” before coming to concrete conclusions.
Politicians, reporters, radio show hosts, authors, and activists often mislead with numbers, whether purposefully or mistakenly. But in my opinion, the financial industry takes numerical subterfuge to its greatest heights.
The ramifications of the misuse and misunderstanding of data and statistics can range from harmless to severe. In the financial world, I see many catastrophic investment decisions made based on misrepresentations of investment risks and returns. Ignorance is definitely not bliss, and it’s vital for investors to wise up about how investment managers and promoters can lie, even with true numbers.
The nuances of this extremely important topic can fill multiple articles, but let’s begin with some fairly simple and common twisting of numbers. Learn to keep an eye out for math manipulation so you don’t get taken in.
Before we dive in, though, mull this classic Dilbert cartoon for a moment…
Big Numbers Without Percentages
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Just because a number is large doesn’t mean it’s important. Reporters like talking about the stock market rising or falling by TRILLIONS because that makes it sound like something big happened, something worthy of breathless reporting. But a $2 trillion tick is approximately 3% of the stock market, worth about $70 trillion in mid-2026, which is fairly ho-hum.
Reading about local grocery sales is more practically useful to most people than a trillion-dollar shift in the S&P 500. Taster’s Choice coffee at 50% off! Now that’s news!
Large Percentages With Meaningless Numbers
On the other hand, when a relevant number is small, reporters may only present it as a percentage to sensationalize the story. Crime rising rapidly sounds like an urgent matter, but it’s important to know: an increase from what level? A 100% increase in lawbreaking may mean that this year, two people dropped litter at the playground, versus one bad boy last year. Not a reason to stop visiting that play area.
True Numbers Without Context
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Another way to mislead, despite using accurate numbers, is to purposely obfuscate context. In 2017, the Asbury Park Press headlined one of many negative articles as “Lakewood Welfare: Half of Children Get Assistance.” While the piece did use both absolute numbers and percentages, it failed to mention that, statewide, 42% of NJ’s children use NJ FamilyCare.
Presumably, that vital fact would have diminished the storyline that Lakewood’s welfare usage is extremely “high” and “widespread.” After adjusting for Lakewood’s unusual student population and family ages/sizes, a 50% usage isn’t dramatic.
Confusing Causation and Correlation
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It’s essential to be on guard for the mental fallacy of mistaking correlation for causation, which leads otherwise smart people to make very foolish conclusions.
One real-life example of confusing causation with correlation occurred when some state governments spent a fortune mailing free books to every child in their jurisdictions. These programs were based on the fact that affluent households tend to have 23 times as many books as low-income households. But, as the bestseller book Freakonomics clarifies, while book ownership is correlated with wealth, that’s no proof that owning books causes wealth!
The rich are also much more likely to own Teslas, tulips, arugula, Rolex watches, and dachshunds (i.e., they’re all correlated with wealth). Should the government send those items to poor homes to increase wealth creation? Once you think about it, you’ll likely conclude that the causation probably is working in the opposite direction: being rich (a factor strongly correlated with education) increases (causes) book ownership, just as it increases tulips and Tesla ownership.
Incomplete Data
A lack of factual disclosure context is the NORM in many investment ads and pitches. I’m all for aiming for the highest possible returns, assuming proper risk management, but advertising only the potential rewards and past successes is quite misleading.
Some real estate syndicators and promoters make generous use of this very “selective disclosure.” If some investors in a strategy made very high returns, others broke even, and another group actually lost money, that’s a material fact that needs to be shared. Investment pitches that don’t provide the context of relevant risks, limitations, and historical returns are a serious form of lying.
Legally Hiding the ‘Casualties’
There’s plenty of guilt to go around in this industry. Huge national mutual fund companies face significant regulatory scrutiny, yet many still use loopholes to muddy the facts.
Because these firms offer dozens, or even hundreds, of investment options, there will always be a few that do well by sheer luck. Mutual fund marketers will trumpet their five-star performers while hoping investors ignore the losers.
Indeed, they consistently keep sending tiny new funds, knowing that some will do well and can then be marketed and sold heavily, coasting on the bid of short-term success.
Then, after a fund does poorly for a while, they just kill it, close the fund, and legally bury the terrible losses they created. (They are not obligated to disclose their fund graveyard, although rating agencies like Morningstar provide this data if you know where to look.)
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This ploy is one way some Wall Street firms can legally maintain an illusion of being talented money managers. In reality, many of them just churn money while taking fees. The numbers are real; the illusion created isn’t. I would encourage you to think deeply about this article and some follow-ups I will work on, because, in my opinion, it is the deft but legal misrepresentations that ultimately cause most financial damage to investors.
What you don’t know can and will hurt you.