One of the most infuriating arithmetical questions that has bugged my life off and on for decades is this: “If your salary was increased by ten percent to raise it to fifty thousand pounds a year, what salary were you previously on?” My gut response is always to say that you were on forty five thousand, because 10% of fifty is five and……wrong, wrong, wrong! (again)
I pondered this as I smugly reviewed my investments on Fidelity recently, mentally warming my hands against the financial glow from the growth, and a somewhat disquieting thought disturbed me – how do I know they’ve got their arithmetic right? All those dividend payments, currency fluctuations and compound returns, minus their management charges across a variety of accounts – I mean, who’s checking the sums on my portfolio are correct? Because I, unable to calculate a simple percentage sum, sure as Hell can’t do it.
I then began to remember the legions of financial controllers and directors I’ve worked with over the years and the errors they (often cheerfully) made in their own numbers. Too many numbers and variables, you see, to ensure that everything was a hundred percent checked. But even the most complex business I’ve worked in, I imagine, would be simplicity itself versus running Fidelity?
Later in the week, I heard on the radio that the government’s state pension forecast tool, which estimates what your state pension will be, was in hot water for giving erroneous projections. Okay, we expect the government to cock up any and every computer system it invests in, but still, it underlined my suspicion that it’s relatively easy for anyone to get their numbers wrong.
The thing is, they could err either way. My investments and pensions could be over or under stated (I can’t actually decide which would be worse). If they wrote and informed me of this, what would my recourse be? Ask for the data so that I could check the numbers?
Ever since Primary Six at school, when I think I first encountered tackling fractions in maths lessons, I’ve struggled with percentages, ratios and functions. Perhaps if that had been a more positive experience maybe I’d have gone on to be an accountant, but I was intimidated by the numbers (and by the teacher). I’m sure many people are entranced by the prospect of puzzling out answers that stack up when they face a difficult calculation, but me, I’m just ever so slightly terrified.
It’s also been my experience at work that if “You don’t know your numbers” then that can be a powerful criticism. There’s little to match the horror in a business presentation than when someone points out that you’ve made a basic error in a spreadsheet calculation. You feel your credibility in just about everything else has just been completely blown out the water (yes, I have been there and got the T-shirt. In fact, a small collection of them). For some reason this can happen to finance people too, but they seem to be able to generally laugh it off. Which I can only put down to confidence in their own ability in this area. When I made such an error I felt like an utter clown and would be genuinely mortified, but if I saw other people do similar I felt it made them a bit more human. (That’s probably two reasons right there why I never made it to “the top”!)
The trick, in your career, is to latch on to someone who really does know the numbers and is willing to check yours. Perhaps that would be a good idea in investments too? Unfortunately they’d probably charge a small fortune to do it and, of course, I’d continually be asking “How do I know you’re right?”
So there you go. I’ve no option but to take my investment performance “on trust”. It’s a lot to ask when I consider that this is my life savings I’m talking about, but I don’t really see much option. Then again, the whole monetary system is built upon trust and very little else. It only exists because we all choose to believe that it does.
As an investor I like to tell myself that I’d never invest in something I don’t understand – and then I read over what I’ve just written, and realise that I don’t actually understand anything.
Well, at least I understand that.