Numbers Don't Lie


We all love a good story. But most of us know in order to make that story more interesting, it gets embellished a bit and sometimes a lot. Hollywood is great example. How many times have we heard that a story is based on true events? I always wonder about the liberties taken around those true events to make the story more movie-worthy.

The investment industry certainly isn’t immune to a good story either. I’m a portfolio manager, and I have the ability to buy products like mutual funds and ETFs that may complement what I do for my clients, just like an investor can buy mutual funds and ETFs from your bank, advisor, or online discount service.   I’ve been to countless meetings where these product managers tell their story and why my clients should invest with them. But this is where the waters only begin to get murky.

Most of these managers have a disciplined process when it comes to investing. They typically invest in stocks and/or bonds. Most investment managers will tell you how they invest.

The following is the investment philosophy of a firm I clipped randomly from the internet. Let me know if it sounds familiar.

Our Firm is a long-term, valuation-driven investment house. Our Firm has a single investment philosophy according to which all products are managed. Our portfolios are managed on an active basis constructed from the bottom up and based on extensive proprietary research.

I’ve no doubt that the firm above or the thousands of other firms have great intentions. But do they really do extensive proprietary research, and what exactly does that mean?  Really, I don’t have the faintest idea, but I do have an imagination so I can conjure up some colorful descriptors.  

What muddies the waters more is that the stocks that fund managers will be professing to analyze want to be seen as favourably as possible. So what will their story be? How will they stand out from all the other thousands of stocks or bonds? 

Maybe none of the fund companies embellish their story or how they do what they do. Maybe no CEO overstates the virtues of their company. Is a truth still the truth if I just tell you the good and not the bad?  Before I suggest I just saw a pig fly, remember that numbers don’t lie, and you need to understand them.

If you want the truth, look to the performance numbers.

If the firm is brilliant, their numbers will stand out from the crowd. To publish performance numbers, all publically-traded investment funds and ETFs have to have an approved audited process for reporting performance.

When we analyze the numbers properly, we get so much valuable information. I’m now to the point where I don’t even want to hear an investment firm’s story until I’ve done my own analysis of their numbers.  My group has developed our own process for understanding the performance numbers. We call it Risk, Return, Recovery™. If the numbers tell a great story, we will take the next step and have a conversation with the manager or firm for the rest of the story.

The world we live in is a buyer beware world. It probably always has been and always will be. But it is getting more sophisticated all the time. Certainly, the financial world is.  Remember, the truth is in the numbers. Regardless of how pleasant and sympathetic the person is who is pitching you, they may not even know they are stretching the truth or maybe someone isn’t giving them the full story.

Everyone needs discipline to determine the truth, either on your own or by following someone else who can prove to you they should be trusted.