An interesting economic factoid has been making its rounds lately: The US economy has only been in a recession for two months out of the last 180-plus. It’s hard to state how great this economic expansion has been. But any statement about how frequently the economy goes into recession has no scientific backing. It is just a heuristic someone came up with, advises Tyler Crowe, author of Misfit Alpha.
Since 1929 (as far back as the St. Louis Federal Reserve’s data goes), this 15-year period has had the least amount of time in a recession. But anything that uses “history says” is nonsense.
The sentence “we have 100 years of economic data” sounds authoritative. This is a period that spans several generations and has witnessed monumental leaps in technology and quality of life. If someone wants to make their argument sound like it has added heft behind it, something like “never in 100 years” can make it sound unprecedented.
But we don’t have 100 years of data to prove this. We have 15 recessions to “prove” this. I know not everyone remembers everything from their high school statistics classes, but I think we all intuitively understand the concept of statistical significance. Basically, for a statistic to be proven or disproven, there have to be enough data points in a set to guess the next data point reasonably.
While my statistics and experimental design skills have diminished, I’m pretty confident that 15 data points aren’t nearly enough to produce a statistically significant result. The “common knowledge” about recessions is that they happen every seven years, too. However, with so few data points, that seven-year estimate is no more accurate than throwing darts at the wall.
One of the tried-and-true ways to attract eyeballs to whatever you are doing is to use really large numbers. Big numbers sound scary and hard to quantify.
But simply stating a big number doesn’t make it significant. As society grows over time, we should consistently post record numbers, whether it be stock market values, total debt outstanding, or any other number. What matters is whether those numbers are outside the historical norms.
If you need a reminder about how large numbers lose their luster over time, consider this. Old Wall Street heads talk about the “Black Monday” crash in 1987 as one of the scariest days in market history. The Dow Jones Industrial Average plunged a jaw-dropping 500 points.
But the Dow just moved 500 points over a period of three trading days, and no one has even batted an eye.
Returning to the “two months of recession in 15 years” theme and the gloating happening in the world of financial media: As great as these past 15 years have been for investors and as awful as they have been for those calling for an “imminent” recession, there is never time for gloating.
Eventually, the market humbles us all in one way or another. One of an investor’s greatest tests is to solve the paradox of having an optimistic outlook on the future while also consistently looking out for the bad outcomes in their investments.
Philip Fisher, the investor, was one of the standard bearers of growth investing and is often held up as an example of what buying and holding great companies for long periods can do for your wealth. But Philip Fisher, the man, was a constant worrier who would scrutinize the finest details when trying to find those great businesses to buy and hold.
When the going is good, we shouldn’t relax our due diligence. Instead, Fisher, Lynch, Graham, and Buffett would probably tap you on the shoulder and tell you it’s time to scrutinize your allocations even more.
