Tuesday, February 21, 2012

Penguin Logic

"If we increase the size of the penguin until it is the same height as a man and then compare the relative brain size, we now find the the penguin's brain is still smaller.  But, and this is the point, it is larger than it was!"

- Monty Python, Penguins
I'm going to coin a new financial term: penguin logic.  The name comes from a Monty Python skit where a quack professor postulates that penguins are smarter than humans.  He first notes that penguin brains are much smaller than human brains, but chalks it up to the fact that penguins are much smaller in height.  He then produces drawings where a penguin has been enlarged to the size of human, but unfortunately the penguin brain is still smaller.  Undaunted by the data, he excitedly remarks that the brain of the enlarged penguin is larger than it was!

In the last few months, I've read quite a number of financial articles that were based on penguin logic.  Start with a sensational headline.  Then build up an argument only tangentially related to the headline.  Eventually back off the original claim, but still declare victory based on the fact that the argument itself was interesting and parts of it were true.

Most of these articles employed a fairly subtle use of penguin logic.  But the other day I read an article that was totally blatant.  The headline was about consistently achieving 20% annual returns in the stock market.  Initially the article made out like the author was easily going to achieve that and encouraged everyone else to do the same.  The article then went over the math about how much money could be made over time with a 20% return, and how much more money that would be than 15% or 10% returns.  Near the end, the article finally acknowledged the fact that almost no one achieves these returns and that the author had no real advice for achieving it, but ended with the conclusion that it was still much better to try for 20% than 10%.  (I am not making this stuff up.  This was an article written for a very well known online financial site.)

Enjoy the video clip below and beware of penguin logic in your financial readings.

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