The big market story this week is the speculation as to whether the ASX 200 will break through the 6,000 point level.
That mirrors the US experience where just a couple of weeks ago, everyone was talking about the Nasdaq hitting 5,000. The technology index has been on a massive run, rising more than 300% since 2002. That's incredible.
Or, depending on how it you look at it, it's up about 0% since 2000. Which is awful.
Or, if you prefer, the Nasdaq has gained about 10% a year since 1990. That's pretty average.
It all depends on your perspective. And your perspective is pretty arbitrary.
One story – two outcomes
The S&P 500 has more than tripled since 2009. Many view this as a sign of reckless bubble-like abandon. Sure enough, dating back to the 1800s, the period from March 2009 through March 2015 ranks in the top 5% of all rolling six-year periods.
But since 2007, the S&P 500 has returned just about 3% per year after inflation. That ranks among the bottom third of all rolling eight-year periods since the 19th century.
So take your pick: The US is either in a historically large, blistering six-year rally, or a historically low, lethargic seven-year slump.
The euro has plunged in value against the US dollar over the last seven years. But it has gained a lot of value against the dollar over the last 12 years.
The Japanese stock market is up about 8% a year since 2002. That's great! But it's still about 50% below where it was in 1990. That is devastatingly bad. On the other hand, it's up about 3% a year since 1980, plus dividends. Given the country's demographics, that's not bad at all.
You can tell stories like this all day long.
'Is that good?'
One of the most important lessons in finance is that everyone has a point of view, and all of those views are incomplete, a matter of your own perspective. And everyone gets to choose what perspective they use.
There's an episode of Seinfeld in which Jerry gets a fighting rooster. He's training the bird, and tells George: "Hey, guess what! Little Jerry ran from here to Newman's in under 30 seconds!"
George asks: "Is that good?"
"I don't know," Jerry replies.
I think we face these kind of problems in investing all the time. We see data without any real context of what's good or bad, and have no idea how to interpret it. So we fit the data around our preconceived views about investing. It's a dangerous bias if you're not aware of it.
It's dangerous because every investor wants to think he or she is being rational. And how do you become rational? You use data. Numbers. History. Math. As long as people are using facts, people believe they're getting the full, unbiased story.
The problem is that, when you throw in perspective, something can be technically true but dangerously incomplete at the same time.
You can use your facts to show the market is overvalued. I can use mine to make the opposite argument. Neither of us are right. Or, actually, maybe both of us are right but come to different conclusions.
