This is the first in a series of articles covering some of the predominant issues regarding financial and economic statistics. This post seeks to introduce why and how statistics matter for investors.
The Why is simple: Investors require information to form expectations and make decisions; help them to comprehend how everything works; and convince stakeholders of their worth.
Investing is the art of calculated risk-taking. Blindly picking heads or tails is outright gambling. Statistics help to sway investors towards a belief in one outcome or another. Data permeates the execution stage of the institutional investment management process. The asset allocation stage requires portfolio managers to form return expectations for asset classes. Security selection requires a further refinement of views. Data is necessary for scenario analysis, back-testing, and stress-testing.
Statistics are combined with historical precedents to shape investor’s expectations – sometimes to their detriment. “While investors are often criticized for having too short a memory, it is also true that they keep fighting the previous war [emphasis added]” (Ilmanen, 2011, pp. 101).
Investment firms have to sell themselves to stakeholders and utilize data to this end.
How statistics matter is a function of their usefulness. Most investors would consider a statistic to be useful if it is relevant, representative, timely, exclusive, and comparable.
The type of stats called upon by investors is seemingly endless: real economic/company fundamentals, financial prices, and instrument-specific information, expectations, and alternative data.