The problem with numbers
The investment world is often fixated on the sayings of Warren Buffett and his colleague Charlie Munger, the nonagenarian investors of Berkshire Hathaway. One such bon mot is, ‘Mankind invented a system to cope with the fact that we are so intrinsically lousy at manipulating numbers. It's called the graph”.
This chimes with us as it says a lot about charities and the investment industry. People are generally either numerate or nervous about numbers, often to the point of intimidation. At best for those who do not have a natural inclination for maths, numbers are dull, at worst it is an excuse not to engage, often with the epithet ‘I don’t do numbers’. That’s a bit like saying ‘I can’t read’. Many charities attract people who are creative and passionate but lack confidence when it comes to balance sheets or cash flow analysis, let alone investments, but this does not mean that it ceases to be a primary trustee responsibility.
On the other side, the investment management industry are generally numbers people who get excited by such things as Sortino ratios, 50-day moving averages and Monte Carlo simulations. The difficulty is when the two sides come together the language is often reduced to a graph. How many hours of PowerPoint presentations have you sat through to prove this fact?
While a picture paints a thousand words (or as Napoleon Bonaparte once said, “a good sketch is better than a long speech”), the problem is that graphs are an illustration of something, not an explanation. Just because it is in a graph, it doesn’t mean it’s true. A manger will often have hunted high and low for the graph to reflect their particular view on the markets, or scaled it to make a particular point.
One of the reasons charities and Berkshire Hathaway have been such admired investors is because of their very long term investment horizons, or as Warren Buffett said, ‘our favourite holding period (for investments) is forever’. Numbers are important and graphs can mislead and result in poor short term decisions. The main thing is to get confident with the underlying arguments, ask yourself if it is a big number of a small one, and follow long term trends.
Try not to be too distracted by the graph but engage the principles. The numbers are not too difficult and having financial confidence is the hallmark of a successful charity. If you want help to get there, please contact us. We can do words AND numbers!