There are important investment lessons to be learned from the reportage on airlines

As Tom Chivers and David Chivers write How to Read Numbers – A Guide to Statistics in the News: “Newspapers print stories about air crashes, which are novel and exciting and rare, rather than about planes that land safely, which is boring and common; so is the public conversation … how dangerous things are.” is filled with a slanted picture.

Interestingly, the data on this paints a much clearer picture- airlines are a very safe form of travel, no matter what we think.

As Hans Rosling, Ola Rosling and Anna Rosling Ronlund write factuality:Ten reasons we’re wrong about the world—and why things are better than you think: “In 2016, a total of 40 million commercial passenger flights landed safely at their destination. Only ten ended in fatal accidents. Of course, they were the ones the journalists wrote about: 0.000025 percent of the total. Safe flights are not newsworthy.”

The newsworthiness of air crashes makes air travel feel more dangerous than it is. Interestingly, we can take a very important investment lesson from this insight.

Over the past few years, there has been an increase in social media-driven investing. Many individuals and investment management firms are offering investment products and strategies by advertising or communicating about them through social media.

An important part of this communication is to let potential investors know that investment strategies or investment algorithms have generated very high returns in the past. And given that they will continue to earn higher returns in the coming days as well. As a part of this strategy, past test data showing high returns is shared with investors. This means that if this strategy had been followed in the past, it could potentially have generated higher returns.

This is where things can get tricky. The problem with numbers is that if you torture them enough, they will accept what you want them to say. These back-tested investment strategies or algorithms are something like this.

If you try a sufficient number of strategies or algorithms based on past data, some will show that a much higher return could possibly have been generated. You can then choose some such strategies and communicate/advertise them to potential investors through social media.

When it comes to reporting on airline landings, that’s exactly what things are about. Given that only accidents are reported, one has a feeling that air travel is risky. Similarly, when only back-tested strategies that work on social media are advertised or communicated, potential investors tend to feel that these strategies will work in the future. Like airline landings, they don’t have the full picture in mind for the way the communication is going.

The strategy that should work is one of the many strategies that the data has been back-tested on. Of course, investors don’t know this. Hence, they get a slant insight on it.

They usually hand over their hard earned money to such money managers only to find that things are not as suggested by the investment strategy examined earlier.

This is not even remotely to say that algorithmic/volume investing strategies do not work. But think about it and think about it, if someone has a quant-based strategy that is working in real time, would they try and make more money for themselves, or would they want to share that strategy in the public domain? Will try, get potential investors to invest money with them and then try to make money from money management. This is a very essential point that investors should keep in mind.

Vivek Kaul is the author of Bad money