

My Favorite Chart on Earth - sharan
http://www.csmonitor.com/Business/The-Reformed-Broker/2011/0118/My-favorite-chart-on-Earth

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brc
All very interesting but the author fails to discuss the survivor bias
inherent in the Dow Jones Index (or any other index, for that matter). This is
the results of the companies that survived. A lot of companies have
dissappeared over this time, both through poor performance or going bankrupt.
In fact, GE is the only company that has remained on the index since it's
inception.

So unless you're buying index funds that track the DJIA, the chart loses it
use. Because when we look at this, we see that the stock market always goes up
with time. But what we are looking at is the fact that the 30 largest/most
successful companies in the USA keep pace with inflation. Which is hardly a
shock.

Note that I'm not arguing some of the authors points, I'm just encouraging an
open mind when viewing graphics like this - you've got to know what you're
looking for.

~~~
simon_
There is not actually survivorship bias in the DJIA, because changes to its
composition are not retroactive. If an index member goes bankrupt, it will
absolutely bring the index level down substantially.

~~~
brc
That is if they are high flying one day, and bankrupt the next. What usually
happens is that they slowly sink in size until they are excluded from the
index, and some other up-and-coming company is included. It's not common for a
company to go bankrupt and be delisted, but it is common for companies to sink
lower and be removed, and then perform very badly from then on as index funds
sell them down.

So you're correct in that bad performance by a firm in the DJIA will affect
the index, however, really bad performance by a company will not be completely
reflected in the index, only the first part of their decline. And that will be
somewhat mitigated by the inclusion of their replacement, which is usually a
growing company.

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qq66
Of course Korea and First Gulf War are not here, since they would ruin the
author's argument. Cue the chorus of people arguing why Korea and First Gulf
are "different."

~~~
throw_away
I don't know if I'm the chorus you're talking about, but they were both much
shorter than the ones marked (gulf war 1: 90-91, korea: 50-53). If he shaded
those boxes as well to the graph, I don't see it "ruining" his argument. The
growth in those four years wasn't exactly spectacular. Very slightly up at
best.

~~~
TomOfTTB
The U.S. was only in WWII from 41-45. It was only in WWI from 1917-1918.

Also saying "The war on terror" is kind of misleading since troop levels have
varied greatly. To give one example the initial Afghan offensive only involved
about 1,300 ground troops. As of 2003 that number was still only at 10,000
([http://www.cbsnews.com/stories/2009/12/01/ap/government/main...](http://www.cbsnews.com/stories/2009/12/01/ap/government/main5850224.shtml))

That's around the same number we had in Somalia (5,300), the '89 Panama
invasion (30,000) and several other conflicts. So the fact that the chart
starts to level off as of 2001 while these other conflicts don't seem to have
made an impact undermines the implied point

~~~
randallsquared
_Also saying "The war on terror" is kind of misleading since troop levels have
varied greatly._

Only if you believe the cause is troop levels. There are lots of things about
a war that could be responsible for a correlation that are not directly
correlated with number of troops deployed.

~~~
TomOfTTB
The author is contending that armed conflicts have an impact on the economy.
I'm offering other conflicts with similar troop levels to disprove that
theory. I'd be open to any other factors you think distinguishes the Afghan
conflict from these other conflicts but just saying there could be other
unnamed factors doesn't further the debate.

~~~
throw_away
Rereading the article, I don't think the author is claiming that at all. The
wording of the original yc comment framed the question in terms of whether
wars are good or bad or what constituted a war, etc., and that's how we
followed, but all the author claims is that wars=inflation and that good dow
years follow inflationary spikes.

I would imagine that the only reason why someone would posit this correlation
would be to say something on how to view our current situation, and I think
he's saying that we've had a bad 10 years (logarithmicly speaking), but once
we're out of this war (by him, inflationary) period, things will be great.

I'm not sure if I buy this argument or its implications, but the omission of
korea, panama, gulf war 1 and somalia and the inclusion of the GWoT don't
"ruin" it for me, at very least.

------
Periodic
Note that the chart uses a logarithmic y-axis, so it is most useful for
relative comparisons. Don't try to get absolute data from it as our brains
aren't built for doing exponential graph transformations.

~~~
ars
A logarithmic graph of money! A newspaper (book?) that actually gets it. It's
astonishing how many linear graphs of money exist - and they are all worthless
and misleading.

And if you need proof that linear graphs of money are misleading then compare:

[http://en.wikipedia.org/wiki/File:Components_of_US_Money_sup...](http://en.wikipedia.org/wiki/File:Components_of_US_Money_supply.svg)
[http://en.wikipedia.org/wiki/File:Components_of_US_Money_sup...](http://en.wikipedia.org/wiki/File:Components_of_US_Money_supply_\(logscale\).svg)

~~~
stoney
Is there a simple explanation for non-economics types like me of why the
linear graph is misleading and the log one is not?

~~~
ars
Yes, here are a few explanations:

Because of compound interest money grows exponentially - the more money you
have, the faster it grows.

Suppose I start with earning 10,000 a year, but my neighbor earns 20,000. Now
suppose we both each 5% raises each year. After 10 years I earn 16288, and he
earns 32577.

Now graph my income over the years and look at the gap between our incomes. In
a linear graph the separation keeps getting larger and larger (we started with
a 10,000 separation, and now have a 16289 separation). But that's wrong - we
are both gaining equally as well. In a logarithmic graph the separation will
stay exactly the same (and notice how when we started he earned twice as much
as me, and he still earns twice as much as me after 10 years).

Suppose I'm in the business of selling stuff.

If I earn $1 per widget, and I can afford to keep 1000 widgets in stock, then
I earned $1000. My neighbor however can stock 2000, and earns $2000. Now
suppose both our profits go up to $1.50 per widget - now I earn $1500, and he
earns $3000.

Now compare: In a linear graph he had $1000 more than me, and now has $1500
more than me. If you graph this over time he will look like he's doing far
better than me - the income gap will keep growing - but really, he's doing
exactly as well as me, it's just he has a higher base.

A logarithmic graph will show the relative difference between us - he has
twice as much as me, and that doesn't change at all.

These explanations would be so much better with some graphs - is there a web
service that will plot these things for me as live data?

One final example:

Suppose we are both businessmen, and we want to see who is better, I start
with $100 and manage to grow it to $200, my friend started with $300 and grew
it to $450. Who did better? I earned $100, but he earned $150 - clearly he did
better right? But if you notice while I doubled my money, he only 1.5'd it.
I'm clearly the better businessman, yet I earned less money.

On a linear graph it will look like he did better, since he now has so much
more. But on a logarithmic graph the truth comes out - I did better. (And over
time I will far exceed his income, and a logarithmic graph will show this
correctly, but a linear one won't.)

~~~
stoney
Great explanation, thanks! It's that miracle of compound interest turning up
again.

~~~
wlievens
The most powerful force in the universe, they say. I love that quote.

------
charlesju
I love how economists make all sorts or ridiculous claims by looking at the
historical stock market. Two or three data points is not a trend, if you have
3 users and they all register, that doesn't mean your conversion rate is 100%.

Sometimes we forget that 100 years of data is nothing compared to human
history and does not signify anything about the future.

~~~
edge17
remember Moore's law? that was based on two or three data points :)

~~~
knowledgesale
a reference to back up this particular claim maybe?

~~~
Symmetry
Moore's diagram's in his origonal paper, presumably. However, while he only
plotted a few data points he presumably used his experience with the semi-
conductor industry in general and so actually had more.

ftp://download.intel.com/museum/Moores_Law/Articles-
Press_Releases/Gordon_Moore_1965_Article.pdf

~~~
edge17
most industry insiders will tell you that Moore's law is a marketing law that
drives timelines more than anything else.

sure he used his experience, but CEO's have also been known to make wild and
extravagant statements :)

------
yarone
Large version of chart, here: [http://www.thereformedbroker.com/wp-
content/uploads/2011/01/...](http://www.thereformedbroker.com/wp-
content/uploads/2011/01/My-Favorite-Chart-on-Earth.jpg)

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nc17
Out of six or seven wars, he picks the ones that make his case. This guy (and
anyone tempted to draw any conclusions from this chart) should read A Random
Walk Down Wall Street.

<http://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street>

~~~
jamesaguilar
Which other relatively long or expensive wars are missing from this?

Wouldn't the length of a war be difficult to estimate at the outset, and hence
be priced in to stock market growth over time? In my economics class they
taught us that war is bad for the (real) economy because the country is
relatively more invested in the engines of destruction than production, and
thus productivity growth in things that make life better is lower. The
conclusions of this chart stand to intuitive reason based on that teaching,
but I'm by no means an expert.

~~~
burgerbrain
Korea.

But to be fair, Korea was dwarfed by WWII and Vietnam in cost and public
awareness. For example, did you know that we're currently technically still at
war with North Korea? There's only a cease-fire, no treaty. We still even have
troops over there...

------
doron
I wonder how the graph will continue if we add one possible scenario.

That the war on terror will last for decades to come, escalating conflicts in
other locations, say Pakistan or somewhere in the gulf (again)

World wide war without end.. The assertion that the war in Afghanistan is
winding down, doesn't strike me as accurate.

In addition the period after the second world war, was marked by a US economic
dominance, as Europe was in ruins and the soviet block stifled economic
development in almost half the globe for several decades including the Vietnam
period until glasnost started to get a footing (in that curious uptick around
1988 perhaps), right till the fall of the Berlin wall.

Things are different now. slightly.

------
b_emery
Some similar charts here, such as S&P Composite since 1871, adjusted for
inflation (much more useful in my opinion):

<http://dshort.com/articles/SP-Composite-pe-ratios.html>

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ramchip
In war time, the economy appears to stall, since the growth is concentrated in
war-related products which do not influence indicators like the consumer price
index. After the war ends, the industry goes back to normal and the CPI
`catches up', making it look like the war boosted economic growth.

That's how we explained it when I studied economics, at least IIRC.

Edit: just noticed the website name. "The Christian Science Monitor". I feel
slightly cheated.

~~~
gjm11
I don't think the performance of the stock market varies depending on whether
the person reading the numbers is a Christian Scientist. If it did, that would
be even more remarkable and weird than if Christian Science were correct in,
e.g., its claims about disease.

(For the avoidance of doubt: No, I am not a Christian Scientist.)

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aristus
This suggests that we are in for a long period of inflation.

~~~
harshpotatoes
True, but look at the bright side, following the long period of inflation
there will be fantastic growth! But really, are any of us keynesians
surprised?

I'm more apathetic to this surprise. Everything looks like linear growth when
plotted on a long enough time line, in log log with a fat marker.

------
thalur
The graph is titled (roughly) "500% rises follow inflation". It could just as
easily be titled "500% rises are followed by inflation" from the same data.

