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by FiveBoxes Staff | 2008-10-22 6:43 

With the elections reaching a fever pitch, no doubt many people have heard one party or the other tout their historical performance in the stock market. Something along the lines of: “If you look back over the past X number of years, if you had invested only when my party was in office, you’d be richer.”

Media outlets such as the New York Times also jump onto the bandwagon. A recent piece by Tommy McCall showed that if you had started with $10,000 and only invested during Republican years, you would have grown your investment to a mere $11,733. But if you had invested that same money during only the years Democrats held the office of President, you would have make $300,671. What a difference!

As the saying goes, there’s lies, damn lies, and statistics.

Numbers can be skewed however you want them. When dealing with numbers — especially dealing with such things as the economy — you need to drill down and look at all the variables. Fortunately, there are people who love to crunch numbers. More fortunate still, some of these people post their results to their websites. Case in point: Theodore Gray, co-founder of Wolfram Research, makers of Mathematica.

First he points out that there are some errors in the methodology used in generating the New York Times’ analysis:

First, it gives each president “credit” for stock market performance from the first day of his administration. That’s not reasonable: it surely takes at least a few months if not years before a president’s actions can start to affect the performance of the market.

Second, it completely ignores dividends: in earlier financial eras dividends were much more important than capital gains, and ignoring them distorts the picture.

Third, it ignores inflation: If the stock market was shooting up during a given administration but inflation was also high, the stock market gains may not count for much. Anyone can print money, that’s easy.

Fourth, there is the problem of the great stock market crash of 1929. While it occurred during a Republican administration, and while there were in fact a full eight years of Republican presidents preceding it, there were a lot of other factors involved as well. (McCall acknowledges this problem by including the observation that if you ignore the Great Depression a Republicans-only investment would now be worth $51,211 instead of $11,733.)

He delves down further, puts a myriad of factors into play, and comes up with some startling and rather surprising results. Rather than spoil the surprise, we encourage you to read his full blog post, then come back here to discuss.

The bottom line: when properly used, the numbers don’t lie. The problem is, many sources of information will “adjust” the factors used to generate their convincing numbers, and hope that you, the average reader, will just take them without questioning, and without doing the math yourself.

Sharpen your pencils, folks. Do the math that politicians — and newspapers — don’t want you to do.

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