Legend has it that investing mogul, Warren Buffet, always eats a packet of Oreos with a tall glass of milk before making any trades. Perhaps that’s why we see big market movements every time Oreo launch a new type of cookie.
Don’t believe us? Here’s the evidence.
In 1974, Nabisco launched the Double Stuff Oreo – twice the filling – a good thing, right? Wrong, that year the Dow Jones crashes 27.5%. Ok, that’s just bad timing, right? The Big Stuff Oreo was released in 1987 – later that year we had Black Monday, where all twenty-three major world markets saw a sharp decline with some falling by more than 40%.
Still an anomaly, right? Well, in 2011 the Triple Double Oreo was introduced. And what happened next? The S&P 500 closes the year out at exactly 0% change despite having a strong performance in the two previous years.
In a move that made everyone think that Nabisco was just trying to toy with world economies, they introduced a short run of limited edition ‘Most Stuff Oreo’ in 2018. They then brought them back for good in January 2020, and we all know what happened to the markets in 2020…
Wait, is this real?
Let's be honest, this sounds like the plot of a far-fetched sci-fi movie, or some really weird conspiracy theory, so if your first thoughts were “yeah, right!” rather than “oh no, my Stocks & Shares ISA!” well done you.
Of course, it’s not real. For a start, the data we show here isn’t really a true picture of what happened. The 2020 thing is a bit of a lie as well, it seems like the Daily Mail were a year late to the story, as the Most Stuff was actually brought back in 2019. A prime example of why you should always do your own research and not just take things at face value.
But if you do go and Google a few things, you’ll see that most of the data lines up – however, it’s been carefully tailored to suit the narrative. It’s not the full picture, and it’s certainly not the cause of any market crashes.
Let’s talk about spurious relationships
If you like maths, then you’re in for a real treat here. The Oreo effect (as I’ll call it) is due to a statistical mathematical relationship called a ‘spurious relationship or correlation’. This basically means that you can associate two separate things and make them look related even if there’s no actual relationship, thanks to the presence of a third factor. In some cases, like this one, a spurious relationship doesn’t require a third variable, it just so happens that these two events correlate.
One example of this could be the relationship between ice cream sales and dehydration. If you looked at the two numbers, you’re likely to see that dehydration cases increase when ice cream sales are the strongest. Now, if you wanted to, you could suggest that ice cream causes dehydration, but the reality is that both these figures increase when temperatures are higher. That makes a bit more sense, right?
What are some other examples of spurious relationships in investing?
Mark Twain famously said, “there are three kinds of lies: lies, damned lies, and statistics” and never a truer word has been spoken. The thing with statistics is that they rely on bringing data together, and as our ability to computer data has increased the number of spurious relationships we’ve seen has also increased. And, spoiler alert, most of them are absolutely off the wall bonkers.
For example, between 2000 and 2009, per capita cheese consumption correlated with the number of people who died by becoming tangled in their bedsheets. There was also a strong correlation between the number of people killed by dogs and online revenue on Black Friday between 2008 and 2010. You can even find a correlation between commercial space launches in the US and Apple’s stock price on 1st January.
These are just some of the spurious relationships in investing that you might see if you started crunching data. In reality, there’s nothing tying these events together except for how the data has been displayed and the story it’s trying to tell.
Cause or correlation
When you’re investing, there’s a lot of things that you may notice when the markets move – some of them could be the cause, for example, the Ever Given ship stuck in the Suez Canal while others simply correlate with it.
However, there are certain correlations in investing that do happen – which is why it can be a good idea to diversify your investments. But it goes further than just picking a bunch of seemingly random investments, you may want to use some statistical problem solving to find “uncorrelated assets”. These are investments that don’t relate to each other at all which could help to manage the risk you’re taking when investing.
Be careful with your information
Fake news is a term that’s used far too often in the 21st century, but unfortunately, it’s essential for making clear decisions about important things. If you were to see the headline of this article, then skim read the top two paragraphs and assume that was all there was to it, then you may be tempted to try and time the market based on the next Oreo release.
Doing your own research is harder than you might think. It goes beyond reading a Facebook post headline or scanning a news article. At Wealthify, we have a team of experts who analyse the markets thoroughly on a daily basis, while using algorithms to do a lot of complicated mathematics and analysis. Taking this approach means that we don’t make emotional decisions – like being scared that Oreo will release a new variety with even more stuffing – and instead, we take a logical and calculated approach to investing.
If you haven’t got the time to do your own research or aren’t confident that you’ll listen to the right information, then investing with Wealthify is easy. You could open a Stocks and Shares ISA with us, choose how you’d like to invest and get started with as little as £1. We’ll take care of all the rest, building you a diversified Plan that matches the level of risk that’s right for you, then constantly monitor it and make changes when needed.
- All correlations found on http://www.tylervigen.com/
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.