Good data has become the cornerstone of successful investing. Through their ability to provide insight far beyond what our own intuition can give, large indexes of performance data allow us to make informed decisions about the markets. But what happens when the data we are relying upon is inaccurate or incomplete?
This is becoming an increasing and serious problem for those analyzing the markets. With data from major stock indexes like the S&P 500, Nasdaq, and Dow Jones Industrial Average easily accessible, investors and analysts have come to rely on this data to make decisions. Unfortunately, this data can be incomplete or inaccurate, leading to bad analysis.
Data inaccuracies can easily occur when you do not have access to the full data set. For example, consider the most basic money management technique — comparing the performance of two stocks’ prices. Although many traders and analysts will simply use the closing prices of each stock on a given day, this does not provide the full picture. Without looking at each stocks’ high, low, open, and close prices, the analyst is not really comparing apples to apples.
Additionally, a lack of understanding of how the data has been collected can lead to faulty analysis. Even if the data itself is accurate, it needs to be correctly analyzed in order to be of any use. For example, if a trader is not aware of the data limitations of a particular index, they may erroneously interpret the data as being indicative of the entire market, when it only describes a certain sector or region.
To prevent bad analysis due to faulty data — and potentially costly losses — it is important for analysts to do their due diligence when it comes to their data sources. Those utilizing data from major indexes should ensure that they have access to the entire data set, and that they understand the structure of the data they are using.
By understanding where the data is coming from, and its limitations, analysts can more accurately gauge market trends and make informed decisions. For investors, access to reliable data is the key to successful trading. So make sure to always check your sources — bad data could lead to bad analysis.