Going beyond statistics as useless information

A few years ago, when our younger son, Douglas, began to participate in the "Tough Mudder" events, he called to tell us how he did. He told my wife that he finished in, as I recall, something like two hours. My wife responded with great pride.

When she communicated this information to me, she was a bit surprised by my reaction: while it wasn't quite "so what's your point?," it was definitely not the enthus-
iastic reply she anticipated. I wanted to know his time
within some frame of reference: perhaps what the ave-
rage time was, or the range of times, or, the average time for men who competed, or the average time of men in his age group. When I learned some of this I respond-
ed with pride as my wife had (perhaps the additional information really didn't serve any value; or, perhaps she knew more about these events than she let on).

 

Statistics are useless information

without a frame of reference

I think you'll agree that this is a valid statement.

Now, permit me to gloat a bit about my son, before moving on. He has now participated in more than a half-dozen Tough Mudder events (including the "World's Toughest Mudder" (a 24-hour event)), a couple Spartan races, a marathon, and numerous other races. Next weekend he will be in a 28-mile Spartan Race he had to qualify for (to put THAT into perspective, a couple
weekends back he was in a regular Spartan event and his time, coincid-entally, was about two hours (2:07:01, to be precise); he finished 215th out of a total field of almost 3,500 par-
ticipants. The event next weekend will only have around 400. Pretty good, I think, for a fellow who didn't do any sports in school (he's the actor in the family) and only recently discovered that he's a pretty good runner and obstacle course lover.

Well, enough of that. So, what's my point? I kind of made it, I think: statistics without a frame of refer-
ence are useless information. But so often we are exposed to examples of numbers being tossed about without any reference, are we not?

To be given a statistic, all by itself, without the benefit of a frame of reference (again, it can be an average, a range, or similar information), serves no (or at most, limited) purpose. Thus, the reason why in our industry we insist upon seeing benchmarks of some sort. An important thing, of course, is that it's relevant.

I recall in early 2000 seeing a full page advertisement of a mutual fund company celebrating the fact that 29 of their funds outperformed the S&P 500 in 1999. Putting aside the fact that we weren't told how many of their funds failed to accomplish this feat, the list of funds that did included their Large Cap Growth, Euro Develop-
ment, Small Cap Opportunity, Global Aggressive Growth, and International Equity funds. None of these would normally be compared with the S&P 500; knowing that they outperformed is, in a word (actually two words), useless information. Well, almost useless, as I guess knowing this is good from a broad perspective, but doesn't say a whole lot about the success of their large cap growth, etc. managers relative to their respective sector indexes.

To avoid touting useless information, we need a bench-
mark or two, but it (they) has (have) to be relevant, unless they're being shown not from the standpoint of this is how we did but rather in case you were wondering, this is how other markets performed.

And yes, both my wife and I are proud of our son.

p.s., Totally aside from anything to do with perform-
ance, I want to comment on one use of notation. I have the following above:

so what's your point?,

that is, a question mark followed by a comma.

I read a year or so ago about the possible introduction of new forms of punctuation which has, instead of the dot, a comma with the question mark:

 I can create this character using the "overstrike" feature of WordPerfect (yes, I use WordPerfect, not MS/Word, but that's a topic for another time), but if I were to use it, how would readers respond? It's not yet "officially endorsed" notation. But I think it's a great idea. A similar figure may be introduced for the exclamation point.

p.p.s., I also used "statistics are" not "statistics is." I happen to think the latter sounds better, but I confirmed that it's more correct to have the former.

p.p.p.s., Can't make out the details in the above table? Just click on it.

Public Comment Period Open for Universal Advisor Performance Standards (UAPS)

The Spaulding Group and Brightscope announced today that UAPS is now open for public comment.

We are very pleased that the announcement has already garnered some attention: both MarketWatch and InvestmentNews have run stories, with more expected.

The public comment period will last until October 18. Please review the document and let us know your thoughts. To read the press release please visit our website.

Even science doesn't need equations ... to communicate idea, that is

I'm probably beating a dead horse, but will persevere, regardless.

This past weekend's WSJ had an interesting article by Stephen Hawking ("A Brief History of a Best Seller"), in which he discusses his famed book's origin. His editor pestered him to make it more readable (which actually was Dr. Hawking's objective, as he wanted a book that could reach the masses).

I found the following of interest: "I am sure that nearly everyone is interested in how the universe operates, but most people cannot follow mathematical equations. I don't care much for equations myself." (emphasis added) Wow! "I don't care much for equations myself."

He continues "This is partly because it is difficult for me to write them down, but mainly because I don't have an intuitive feeling for equations. Instead, I think in pictorial terms, and my aim in the book was to describe these mental images in words, with the help of familiar analogies and a few diagrams."

Hawking and I are in agreement on the benefit of using "images in words," "familiar analogies, and "diagrams" to communicate ideas.

In our training classes, for example, we use the following graphic to discuss attribution's effects:

I believe Andre Mirabelli may be responsible for it. I think it's a great way for folks to picture how the effects are derived.

To explain "macro attribution," I came up with

And

to demonstrate how the contributions to return are arrived at using Andrew McLarin's fixed income attribution model.

We use a series of graphics, culminating in

to contrast the differences between the way Brinson, Fachler and Brinson, Hood, Beebower derive attribution.

I love metaphors, and use them frequently. And, I even cite a few episodes from Seinfeld and an occasional Doonesbury comic strip to communicate ideas.

Hawking isn't saying that formulas aren't needed, because they clearly are; however, there are often better ways to communicate ideas than relying solely on the math.

A cool word: battology

I love dictionary.com; it has a "word of the day" which is often one I'm unfamiliar with. While many are words that fail to inspire me, some do.

A few weeks ago, battology was the word they introduced.

What a great word! I knew at first it was one I'd like.

When I review letters and other documents we produce, I often discover word repetition that is unnecessary. I saw it today in today's WSJ (and, just provided an example of wearisome and unnecessary word repetition ... I could have done better, right?). In an article on the Yankee's (my wife's favorite team, by the way) titled "The Yankees' Real Rival" we read "Joba Chamberlain had a rough night that night." Must have slipped by the editor. First, the "that night" could have been dropped, as "that night" (Thursday's, to be exact) had already been established. Or, if it was felt that these two words were needed for clarity, than "rough time" would have avoided the dual appearance of "night" in the same sentence, and oh, so close together.

I love the saying that "there is no such thing as writing, just rewriting." For it's in the rewriting that we usually discover the presence of battology. Great word, right?

Sector returns: with or without cash

I recently conducted a "non-GIPS(R)" verification for a client's sector returns. They have sliced up their portfolio in a dozen ways (e.g., U.S. growth and value; small, mid, and large cap; emerging markets) and presented returns for a multi-year period. They chose to include cash, which they allocated to each segment. My question: should the cash be there?

I asked our client if these segment returns were to:

a) represent these sub-strategies as being independent, so  as to suggest that this is how they would have done had they been managed separately (e.g., a U.S. growth strategy, a U.S value strategy), or

b) show how each segment did as part of the portfolio (e.g., this is how the U.S. growth stocks did, this is how the U.S. value stocks did)?

They said that the latter applied. That is, not to hold the results out as if this is what would have been obtained by managing separate strategies, but rather to show how the different components of the portfolio performed.

This seemed to make sense, given that there were times when there would be only a single security in the segment (and at times, no securities), which I think unlikely for a separately managed strategy.

Therefore, in my view, to include cash would muddy the results. While our client referred to the cash inclusion as being a "cash drag," of course there would be times when cash might actually boost performance (think 2008, 2009).

Regardless, if, as a client, I'm interested in knowing how components of my portfolio did, I wouldn't want the inclusion of something else that would alter the results. Make sense?

Press Release: The Spaulding Group Appoints Mark Goodey - Associate for European Business Development

We have known Mark a long time, and respect and like him a great deal. We know that he will be a great addition to our team, and are anxious for him to join us.

This new position demonstrates our commitment to the European market, and our desire to expand our services into this region. We already have several GIPS®  verification clients there, hold the number one performance measurement conference in Europe, have hosted the European (now EAFE) Forum there for close to 15 years; and many of the purchasers of our books and subscribers to The Journal of Performance Measurement® are based in Europe. In addition, we have conducted both in-house as well as open-enrollment training and provided consulting to several European clients With Mark's assistance, we look forward to offering our services and products to even more institutions in the region.

To learn more, please go to the actual press release.

It's not JUST about the numbers, but pretty darn close ...

Last week I offered a theory as to why retail investors may not be interested in rates of return, and it resulted in numerous comments from readers.

As I was preparing this post, I read the following in an "Op Ed" piece in today's WSJ, by David R. Henderson, titled "The Man Who Resisted 'Blackboard Economics'":

"Ronald Coase, who died on Labor Day at age 102, was one of the most unusual economists of the 20th century. He won the Nobel Prize in 1991 for his insights about how transaction costs affect real-world economies. In a 75-year career he wrote only about a dozen significant papers, and he used little or no math.

Yet his impact was profound."

The ability to convey economic, as well as financial and investment, ideas without the aid of mathematics is important, though we cannot lose sight of the importance of numbers. In the brief paragraph above, note the number of numbers that appear (102, 20, 1991, 75, 12)!

What actually served as the genesis of this piece were two events that were highlighted this past weekend.

The first was about Thomas Merrick, someone no doubt unfamiliar to most folks. He spent 65 years working for a railroad and just retired at age 91. He was a World War II veteran. This article

impressed me because of this individual's desire to continue to work, long past the time when many retire (at the present time I have no plans to retire, and so glory in such stories). Here we learn how long he worked (65 years) and his age at retirement (91). Numbers are the way we convey important facts; to say that this "old guy" finally retired after working for "a long time" is lacking important details. Without numbers, we're unsure about how old he was and for how long he worked; plus, one might find the characterization a bit insulting.


The second is about Diana Nyad, the 64-year old woman who swam from Cuba (my mother's birthplace, by the way) to Florida, through shark-infested waters, without a cage; the first person to do

this. She covered a distance of roughly 110 miles in 53 hours, and this was her fifth attempt. Again, we see the use of numbers to provide key details about this woman's feat. Would the story be as good without them? Hardly.

Math matters ... a lot.

Someone posted the following puzzle on LinkedIn:

Well, I guess I am a bona fide genius, as I solved it in less than two minutes. But seriously, only one out of 100 folks can? I'm a bit suspicious about this claim. Granted, it does require some degree of analytical skill, but I'd be surprised if the actual number wasn't higher. And, to suggest that by solving it you're a genius is a bit hyperbolic, no doubt.

Although my fondness for mathematics has been part of my DNA forever, I also value the ability to communicate without and/or about the numbers in a meaningful way. I think for many performance measurement professionals, this can be a challenge. At next year's PMAR conferences The Spaulding Group will have sessions on this subject: the ability to add insight to the performance measurement results.

I think this is a critical part of being a performance measurement professional; i.e., it not just about the numbers. (Okay, it's mostly about the numbers ... Or perhaps not! A debate topic, perhaps!)

p.s., Speaking of geniuses, I like this quote from Polish-American mathematician Mark Kac: "An ordinary genius is a fellow that you and I would be just as good as, if we were only many times better. There is no mystery as to how his mind works. Once we understand what he has done, we feel certain that we, too, could have done it. It is different with the magicians … the working of their minds is for all intents and purposes incomprehensible. Even after we understand what they have done, the process by which they have done it is completely dark." Our industry is blessed to have both "ordinary geniuses" as well as a few "magicians."