Yesterday morning, we learned of Rupert Murdoch’s bid for Time Warner for as much as $85 dollar a share, or more than $75 billion. Soon after, the annotated chart below showing the Standard & Poor's 500 Index began circulating on trading desks and websites, suggesting Murdoch's offer signaled a market top.
It is such a misleading piece of statistical tripe that it cried out for a rebuttal. It is a prime example of confirmation bias writ large, another in a long line of weak analyses, wishful thinking and intellectual laziness that pollutes the Web.
There are numerous ways to debunk this bilge water, but for brevity’s sake, I will limit my wrath to a few quick lines of attack: Cherry picking, bad correlations, small data set, and randomness.
If Twenty-First Century Fox chief Murdoch only made three acquisitions, and they all occurred at or near market tops, the chart would be much more interesting. Of course, Nassim Taleb would then wag his finger at you, warning that you are being fooled by randomness.
Your pattern recognition sub-routine is again deceiving you.
Even if Murdoch only made acquisitions at those major tops -- two before and now a possible third -- that small sample set wouldn't signal much of anything. A sample size of two is a laughable number, too small a group to draw any significant conclusions, much less that this bull market is over.
There is no statistical significance to this data. The only thing it indicates is coincidence. As we have noted before, sometimes correlations lie.
Much worse than being fooled by random correlations, or relying on a tiny sample set, is when analysts mislead by omitting contradictory information. Cherry picking data occurs when one selects only examples of an event that confirm a thesis, ignoring or disregarding those that disprove it. The above chart epitomizes this deceptive approach.
Some of the time, this sort of bias is unconscious. Other times it’s a willful and intellectually dishonest, an attempt to confuse or mislead the reader. I have no information which of these categories this chart falls under, though I will give the benefit of the doubt and assume it’s the former and not the latter.
Over the course of a 60-year career, Murdoch has built up a huge media and content company. Much of that conglomerate building was driven by many, many acquisitions. How many? If the answer is more than three it voids the chart.
Note the following list of Murdoch acquisitions according to Sourcewatch.org:
1. Sunday Times in Perth, Western Australia (1956)
2. The Daily Mirror (1960)
3. New Zealand daily The Dominion. (1964)
4. News of the World (1968)
5. The Sun (1969)
6. The Daily Telegraph (1972)
7. San Antonio Express-News. (1973)
8. New York Post (1976)
9. Times and Sunday Times (1981)
10. 20th Century Fox (1984)
11. The Herald and Weekly Times Ltd (1987)
12. British Satellite Broadcasting (Merger, 1990)
13. Star TV (1993)
14. Michael Gudinski's Mushroom Records (1999)
15. Hughes Electronics [34% stake] (2003)
16. Intermix Media (MySpace). (2005)
17. IGN (2005)
18. Dow Jones (2007)
As you can see, the answer is more than three. This is only a partial list, though it does cover most of the major acquisitions.
What it doesn't include are Murdoch bids that failed to succeed. Lots of factors go into an acquisition, and if we are looking at Murdoch as a signal of a market top, then it is his bids for companies that matter and not whether they succeed. He explored buying AOL Time Warner in 1995, by no means a market top. Same for an offer for the Yankees Yes Network in 2012 -- and lots of others we probably don't know about.
Regardless, the chart is bollocks, and its authors should be ignored as fools.
I have discussed confirmation bias and selective perception so many times I fear I will send the reader into a coma if I keep at it. Rather than me drone on again on what appears to be my favorite subject in these pages, I will quote my friend Phillip Pearlman:
Recently, I notice that every event is pointed to as a potential contrary indicator. It just seems like someone somewhere pops up pointing out that this or that event marks a top or a popping of a bubble or whatever. When the whacky Yo funding news hit two weeks ago, pundits lined up to point out that this could be the top of the VC bubble. More recently, Santelli’s insane rant marked the top for equities. Then, Yellen mentioning stocks marked a top. Then, this morning, Murdoch’s bid for Time Warner, ‘may be the best bearish contrarian indicator yet.’
Just stop already.
Pearlman goes on to say that if everyone is so busy looking for the top, it probably tells us that sentiment of this nature means it isn't a top. There will always be something that becomes symbolic of any major reversal, be it top or bottom. These are essentially random events, chosen years later with the benefit of hindsight. They are almost humanly impossible to spot as they occur.
To contact the author of this article: Barry Ritholtz at firstname.lastname@example.org.
To contact the editor responsible for this article: James Greiff at email@example.com.