<FOOLISH WORKSHOP>
On the Proper Use of Lampposts
by Ethan Haskel ([email protected])
Baltimore, MD (November 25, 1998) -- A few months ago, I came across this letter to the editor in the October Issue of Smart Money magazine. Below is the letter printed in its entirety. Please read it and take a few minutes to ponder its content before continuing the column.
Thinking Young
Your reference to Reader's Digest magazine's audience as "the shuffleboard set" (Contrarian, Street Smart, August) might have made a clever lead if it were true. The median age of our readers actually declined from 1996 to 1998 from 47.4 to 47.2. Moreover, it has been rising at a slower rate than that of most magazines and the U.S. population as a whole. During the past 10 years, Reader's Digest's median age rose 4.4 percent. By comparison, the newsweeklies had a 10.9 percent increase in median readership age during that period, while the general population had a 4.5 percent increase.
Reader's Digest reaches more adults with household incomes of $100,000 or above than Fortune, Business Week and The Wall Street Journal combined. The magazine has nearly twice as many 18-to 34-year-old readers as Rolling Stone and reaches more 18- to 49-year-old adults with children than Parenting, Parents and Family Fun combined. Our 48 editions and 100 million readers make us the world's most widely read magazine. A large part of our success is due to scrupulous fact-checking.
Christopher Willcox
Editor-in-Chief, Reader's Digest
Pleasantville, N.Y.
OK.... Thinking time's up. What's your reaction?
Too many people, short of both time and training for rational analysis, would take Mr. Willcox's letter as gospel and conclude that his "scrupulous fact-checking" offered the perfect rebuttal. In a remarkably short space, the editor has given us at least 11 facts to digest, in order to refute the original assertion that his magazine's audience is "the shuffleboard set." Unfortunately, each and every fact, although probably technically correct, is essentially irrelevant to his main argument, which is that the Reader's Digest audience shouldn't be considered older than average.
Let's take each of these statements and look a little closer:
"The median age of our readers actually declined from 1996 to 1998 from 47.4 to 47.2. Moreover, it has been rising at a slower rate than that of most magazines and the U.S. population as a whole."
These statements (and the next few immediately following) relate to how the composition of readers may be changing over time, but begs the issue as to the actual age of the readers in comparison to other magazines. Also note that the writer chose two specific years to infer there was a decline in the age of readership. While that technically may be true, it's unlikely that the numbers presented have any statistical significance (47.4 vs. 47.2). Furthermore, the years chosen were likely handpicked to "prove" the author's point.
"During the past 10 years, Reader's Digest's median age rose 4.4 percent. By comparison, the newsweeklies had a 10.9 percent increase in median readership age during that period, while the general population had a 4.5 percent increase."
Granted, the age of the Digest's readers is increasing with the population as a whole and increasing less than that of the "newsweeklies." But what does this really have to do with the original argument, that the readership isn't older?
"Reader's Digest reaches more adults with household incomes of $100,000 or above than Fortune, Business Week and The Wall Street Journal combined."
So what's the point? I thought we were considering the age of the audience, not its income.
The magazine has nearly twice as many 18-to 34-year-old readers as Rolling Stone and reaches more 18-to 49-year-old adults with children than Parenting, Parents and Family Fun combined.
Let's look at some numbers for total paid circulation in 1996, in millions, according to The New York Times Almanac.
Reader's Digest 15.1 Rolling Stone 1.3 Parenting 1.1 Parents 1.7 Family Fun 0.9 (not listed)
So even if only a small fraction of Reader's Digest readers were young, the shear size of the Digest audience would overwhelm the numbers for the other magazines. That makes the statement technically true but, again, irrelevant to the main argument. Taking this argument to its logical conclusion, there may well be more young readers of the Digest than of Highlights magazine for children, but this observation would be irrelevant to the issue at hand. And nowhere does Mr. Willcox mention Family Circle, the most widely read of the "family" magazines. Of course, it's probable that, considering Family Circle's 5.2 million readers, his statistics wouldn't fit.
If the author truly wanted to prove his point, why not simply take the median age of the Reader's Digest audience and compare it with that of other magazines (or to the population in general)? Case closed.
So what in the world does this all have to do with investing and, more specifically, with the Workshop? Simply -- everything!
The entire premise of the mechanical stock screens rests on the theory that there are certain quantifiable characteristics of stocks that lead to their long-term outperformance. The ability to ferret out rewarding stock screens and use them correctly requires an ability not only to ask the right questions, but also to apply the proper quantitative tools to evaluate the screens. Without this ability to think logically and independently, Fools come under the spell of Wise men and become subject to the Wise men's pitfalls.
Just a smattering of these pitfalls are:
-- Using short-term results to determine worthwhile long-term strategies.
-- Discarding a perfectly good proven strategy because of a year (or two) of sub-par results.
-- Not understanding that the risk of equity investments is minimized the longer the investment period.
-- Acting reflexively on the advice of others who spout statistics without asking if their numbers make sense or are even relevant to one's investment situation.
Most of the market gurus we know would fit the description of Scottish historian and poet Andrew Lang (1844-1912):
"He uses statistics as a drunken man uses lampposts -- for support rather than illumination."
The capacity for independent, logical thought is one of the most important traits for a successful investor. My undergraduate philosophy course, with its emphasis on the analytic process, has served me well time and again in this regard. Unfortunately, I suspect that's one subject you'll not find in most MBA course catalogs.
Foolish word for the wise: Stuff the turkey, not yourselves.
******
Beating the S&P year to date returns (as of 11-24-98):
Anheuser Busch +38.4% Emerson Electric +18.4% Ford +59.9% Kimberly-Clark +7.2% Texaco +9.5% Beating the S&P +26.7% S&P 500 +21.9% Compound Annual Growth Rate from 1-2-87: Beating the S&P +20.8% S&P 500 +17.5%
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