I wrote about tech and the Nasdaq on Tuesday, and since then, it’s continued to be a bit of a rollercoaster. Maybe that correlation between the Nasdaq 100 (ticker: QQQ) will reverse again. Your guess is as good as mine.
One of my points was that when a relationship keeps changing like this, often times there is no relationship at all. Said another way, there’s a big difference between correlation and causation. Visit this website to see several hilarious spurious (illegitimate) correlations like this one:
Pro tip… Throw 1-3 of these charts in a market update presentation to clients. You’ll get some laughs and the audience will think you are smart.
But there are instances when relationships do exist (they aren’t spurious) but still make no sense. One real world example is the inverse correlation between experience and quality of work for a cab driver. I’ve done the math, and the correlation between the amount of time driving a cab and the measured skill of driving a cab is precisely -0.98.
And I’m not saying this because I view cab drivers as merchants of Satan. Let’s put aside their lack of manners, cleanliness, comfort, properly working air conditioning, peace and quiet, credit card acceptance, a working ez-pass, scheduled car maintenance, and the other 1,000 reasons to hate them.
There is no bias here. I am purely focused on the data. I spent years in NYC absolutely shocked at this inverse correlation, but it’s real. The more experience a cab driver acquires, the worse they become at driving a car.
This is a fact, and it has always baffled me. Seriously, try to name another profession where the more experience one gets in a job the worse they are at that job. I can’t do it.
For example, I know nothing about knitting. If you gave me those needles, the only thing that would come to mind is sushi. But if you locked me in a room with a ball of yarn and a few YouTube videos, I’m pretty sure I’d be wearing a new sweater come Labor Day.
The reason I say that with such confidence is there tends to be a correlation between practice and expertise. In that it’s generally assumed that more practice causes expertise to improve.
But not with cab drivers. Here, it’s the exact opposite.
My point is that a relationship can exist while the cause remains a mystery. That’s why it’s risky to make investment decisions purely on an observed correlation.
And this ties into what I wrote about this week. Many of the mistakes I’ve made as an investor have been misinterpreting data and/or jumping to conclusions from it. I chronicled several other mistakes and hopefully your clients can learn a little and step away from the market this week. We all need a break.
Enjoy the weekend…