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Chapter 15. Ten Lessons for Investors > Lesson 7: Numbers can be deceptive

Lesson 7: Numbers can be deceptive

For those investors who are tired of anecdotal evidence and investment stories, numbers offer comfort because they provide the illusion of objectivity. A study that shows that stocks with high dividends would have earned you 4% more than the market over the last five years is given more weight than a story about how much money you could have made investing in one stock five years ago. While it is sensible to test strategies by using large amounts of data over long periods, a couple of caveats are in order:

  • Studies, no matter how detailed and long term, generate probabilistic rather than certain conclusions. For instance, you may conclude after looking at high dividend paying stocks over the last five years that there is a 90% probability that high dividend stocks generate higher returns than do low dividend stocks, but you will not be able to guarantee this outcome.

  • Every study also suffers from the problem that markets change over time. No two periods are exactly identical, and it is possible that the next period may deliver surprises that you have never seen before and that these surprises can cause time-tested strategies to fall apart.


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