If you are an enlightened and concerned citizen here in the U.S. of A. -- or anywhere, really -- I hope you'll take it upon yourself at some point in your adult life to read a John Allen Paulos book. Paulos writes about numbers. His seminal work is probably Innumeracy, so you might start there, but A Mathematician Reads a Newspaper is about as good, and you might find something else among his oeuvre that suits your particular fancy.
Anyway, these are books about numbers.
"Books about numbers?!" you protest. "Not for me!" Which is exactly Paulos' point. Paulos, a mathematics professor at Temple University and an occasional guest on our Motley Fool Radio Show, both highlights and attempts to rectify America's fear of numbers. Many feel that illiteracy is a heinous condition that must be combatted, but for some reason innumeracy (a fear of, or inability to use, numbers) is OK. Acceptable. Maybe even cool, as in, "Oh, I've never bothered with numbers -- can't understand the silly things!"
Numbers are your friends
But as an enlightened and concerned citizen, you should not afford yourself the luxury of any such proud ignorance. How can you vote and vote well if you're easily duped by a politician's use of the "latest study"? Our pal Philip Marston, featured for a few minutes on last Saturday's radio show, once requested that any organization or journalist who EVER publishes a study should include the assumptions made by or within the study either in the headline or the first paragraph. I like! There's a devilishly fun and slim volume entitled How to Lie With Statistics that proffers the same viewpoint.
So going back over the basics of numbers is my Motley Fool plea to you today, and Paulos' books -- written for liberal arts majors of all stripes -- can be one such step in doing so.
The investor enjoys and insists on numbers, and the Rule Breaker is satisfied in thinking that he or she is breaking the rules, playing the Fool, simply by going one direction (i.e. actually liking numbers) when the majority goes the opposite way. Yes, I say majority, if Paulos' observations about our well-educated journalists frequently misusing or being gulled by numbers is adequate proof. And how about our politicians? This is Fooldom. Let's talk money.
Adjust for inflation!
If I could wave my magic wand today, I would forever imprint on the brains of our legislators the concept of "inflation adjustment." As in, "Uncle Sammy, let's adjust that for inflation, OK?"
It was something like 1978 when our investment retirement account limits were set at $2,000. Where was the fellow suggesting at the time that this number be escalated over time to compensate for inflation? If he or she had anything to say at the time, not enough people were listening. Consequently, here we are a staggering 23 years later and the present IRA contribution limit remains (a much, much devalued) $2,000 per year.
If it had been simply adjusted for inflation, the contribution limit would now be about $5,500. The House has now approved a long overdue adjustment to $5,000, and it sits waiting for Senate consideration. Is this number itself designed to be "inflation-adjusted"? Not to my knowledge. Will it take another 23 years for our public servants to vote to ratchet this number up again? Will we figure out before then the uncomplicated solution of "inflation adjustment"?
And this isn't just about IRAs or 401(k) plans (also overdue for inflation-adjustment).
The McCain-Feingold soft-money prohibition bill (full disclosure: I don't think this bill will prevent soft money) compensates for legislating OUT "soft money" by legislating IN a hard money contribution limit increase. Yep, that's right, since 1974 you and I have not been allowed to give more than $1,000 to a political candidate, and McCain-Feingold proposes increasing this to $2,000. The funny thing is that it takes $3,600 today to equal 1,000 1974 dollars.
In other words, there's been no inflation adjustment.
Put numbers in the proper context
If a mathematician comes across obvious errors in our daily newspapers, and a casual non-specialist in numbers like me finds blatant oversights that our Congress apparently misses, what must this suggest to the Rule Breaker investor? I'm stating right here right now that I think you and I will gain numerous advantages over other market investors if we can read and put the numbers in context better than they can. Consider that something like half the world (in my experience) thinks stock splits are a real positive ("because you have more shares"), or that penny stocks are attractive because "if they just hit $2, I'll double my money." Consider the simple point of the "Percentages, Not Points!" chapter of Rule Breakers, Rule Makers. Consider the disconnect that many people make when they isolate price-to-earnings ratios from growth rates, and you know what I mean.
Anyway, just this simple humble thought for you on this otherwise unexceptional day, dear reader. I write for my Rule Breakers, my countrymen, and our allies. Let all others fail to understand.
David Gardner is co-founder of The Motley Fool. The Fool has a full disclosure policy.
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