The psychologist Dan Gilbert once said “Findings from a multitude of research literatures converge on a single point: People are credulous creatures who find it very easy to believe and very difficult to doubt.”
I’m guilty of this. I’m much more inclined to see something and say, “Huh, that’s interesting” rather than “this is total garbage.” But there are limits, even for people like myself whose knee-jerk reaction is to believe rather than to doubt. Below is chart that I saw from a Bloomberg article, which compared the price of bitcoin and the forward P/E of the S&P 500. “Peaked together…and bottomed together.”
Here’s an actual quote from the article: “While we do not expect this relationship to continue to hold so tightly we do think it will be hard for price-to-earnings to move significantly higher or lower without a commensurate move in the digital currency.”
Okay. This is total garbage.
Lines on a chart can move in one of three directions: up, down, or sideways. So coming up with a conclusion and working backwards to find a chart that supports said conclusion is fairly easy. For example, below is a chart I created…
…The implication is that the black and red line have tracked each other fairly closely, and “if history is any guide,” we should expect the black line to top out out over the next few sessions. But the black line and the red line have nothing to do with one another. The black line is the Dow from January 1950 to March 1956 and the red line is Altria from January 1979 to November 1985.
It’s not good to believe everything you see, but dismissing everything is no way to go through life either. Consumers of financial information would do well if they can find a middle ground. Read with a healthy skepticism and realize that the truth often lies somewhere between belief and doubt.
Michael Batnick is a managing partner at Ritholtz Wealth Management. He is the co-host of Animal Spirits, What Are Your Thoughts, and The Compound and Friends. For disclosure information please see here.