Don't Let the Numbers Crunch You

Statistical trickery dazzled a lot of unwary investors before the global financial meltdown. Too many based investment decisions on flashy but deeply flawed statistical analyses that pointed to, for example, unreasonably high yields coupled with low risks. So a lot of people lost their shirts.

Taking heat for some of the disastrous hocus-pocus were a few well-known and an army of nameless numbers crunchers working for international ratings agencies, brokers and the business media. To protect their reputations – and jobs – some slippery financial analysts found ways to pass blame to other no-names, such as so-called "greedy" investors who neglected to do their homework and "foolish" homebuyers who bit off more than they could chew.

Now that the world seems resigned to the meltdown's messy aftermath, it appears some of these statistical tricksters feel safe enough to crawl out of their holes. Why not? For the most part, their reputations have remained intact while victims of manipulated figures have grown cold in the grave. Moreover, flawed numbers crunching can be quite profitable for those who don't get caught.

And dazzling. For example, an oft-quoted Australian market analyst we won't name recently declared that wise investors these days are trading stock on U.S. exchanges based on movements from the previous day on the Shanghai stock market. As the Shanghai Composite Index rises or falls, the analyst argued, the Dow Jones Industrial Average follows suit. "China leads market behavior and America follows," he recently wrote in a Chinese newspaper. "The rest of the world may follow the Dow, but smart investors know the Dow is now following the behavior of the Shanghai index."

How does this explanation sit with you? Is it too simplistic? Hocus-pocus? Or sound analytics? We're not in a position to judge definitively. But aside from a few who wound up disgraced or jailed, we think a lot of statistical tricksters are still around and looking for ways to make quick cash. Some may be lurking in the business media.

For investors who survived the meltdown, this is a good time to be cautious – even suspicious -- when professional numbers crunchers open their mouths.