VR Logo

The Magic of Numbers

Our aim at Value Research is to provide judgements that are based on quantitative data and rigorous research rather than on the general claims and the mood of the market...

The US Presidential Elections are over, and I’m very happy with what happened. My happiness stems not from the re-election of Barack Obama (I could have lived with either of the two candidates), but from a most interesting sideshow that was going on among various people who were predicting the outcome of the elections in the media. This sideshow holds some lessons for how we work at Value Research and how you, as mutual fund investors, should choose your investments.

In the US elections, there were two kinds of prediction-makers, or psephologists, as they are called in India. On one hand, there were the traditional pollsters and pundits. These people use either simple opinion polls or just the expertise of experienced political observers. When they do use the numbers that come out of the opinion polls, they limit it those to just seeing what percentage of people prefer one candidate over the other and draw conclusions based on that. Most major media organisations follow this methodology, and since the opinion polls showed Barack Obama and Mitt Romney at roughly the same level, the consensus view was that the race was a close one. All reporting of the US elections in the Indian media too portrayed the elections as a neck-and-neck contest.

However, there were also a rather different breed of people who were predicting that the probability of Barack Obama’s winning the elections was somewhere around 70 to 80 per cent, even though the number of votes cast for him would be about 51 to 52 per cent. The most interesting among these is a young statistician named Nate Silver. Silver had built a complex model that looked at each state (using the same opinion poll data that traditional pollsters used) and then ran an elaborate computerised simulation that tried all possible combinations of all polls being right or wrong by different margins in different states. In some 70 or 80 per cent of those situations, Barack Obama would win the elections.

So the conclusion of Nate Silver’s number-crunching was that although Obama would have only a tiny margin in the number of votes cast, there was a very high statistical probability that that tiny margin would get him re-elected. It’s a somewhat sophisticated idea, which the traditional media pundits refused to appreciate. All through the run-up to the elections, Silver was ridiculed by a lot of people.

However, when the elections results came, his numerical approach was proven to be completely correct. Not just the presidency as a whole, but also the individual results of all 50 states in the US came out to be exactly as he had predicted, as did the overall popular vote.

Numbers triumph over hunches and general punditry. This is the principal on which everything that we do at Value Research is also based on. Our star rating system for mutual funds is a completely numbers-driven exercise. Ours is the only such fund rating system, in which there is no subjective judgement involved. We face a lot of flak from fund houses and other analysts when the system throws up counter-intuitive results but we’ve tried and tested this philosophy for two decades, and have found that it’s the one that serves investors best.

Sure, we offer opinions too, but they are reality-based opinions that are grounded in data instead of the claims of fund houses and the mood of the times. We find that such opinions are easy to justify, because they have the great advantage of generally being correct.