What disappearing Easter Eggs tell us about investing
The price of chocolate has been rising faster than inflation and, unfortunately, the price of Easter eggs is no eggception. Manufacturers have responded to price pressure with shrinkflation – that is making their eggs smaller than last year. Analysts at Actuarial Solutions have looked at the level of shrinkflation in the Easter egg market and concluded that Easter eggs will completely disappear by 2050.
The analysts looked at the size of a selection of popular Easter eggs in 2010 and compared them with today. As you can see in the chart below, performing a statistical “linear regression”, or what you might call drawing a straight line, concluded that if the present rate of shrinkflation continues the Crunchie Easter egg, as the most endangered, will shrink to zero by 2040 and the Twirl and Wispa Easter eggs will disappear by 2050. We will be left with just the packaging and dental bills in 25 years’ time, but not the chocolate eggs.
Source : Actuarial Solutions | Easter Eggonomics – Actuarial Solutions
Of course, the analysts at Actuarial Solutions are using statistics and imperfect data to have some fun and come up with absurd conclusions. Using the same data they eggstrapolate back in time and deduce that a chocolate egg at the time of the first Easter, in about 30AD, would have weighed up to 26 kilograms.
Poking fun at Easter eggs does have a serious point to it: that absurd conclusions can be drawn from any data, particularly the sparce data used above. When we invest we should try to be dispassionate and rely on evidence-based research derived from robust long-term data rather than chase the latest investment fad or theme.
Inexperienced investors will often ask why do we bother with the European or Emerging Markets equities when the US equity market has performed consistently well for the last 15 years (ironically the length of time used in the Easter egg research). We know from longer term data that the US may not always outperform and that there will be a time when the European and Emerging Markets equities will do well.
Similarly, we should not chase the performance of the Mag-7 stocks as long term experience shows us that stock performance fades, and new companies emerge to take over the market leadership.
Another good example of using doubtful data is the performance of hedge funds. Hedge-fund performance is not generally publicly available so the firms that produce hedge-fund indexes rely on the funds themselves to report their own performance. This results in very strong risk-adjusted performance to the extent that you would not invest in anything else.
The self-reported nature of the hedge-fund indexes should already be ringing alarm bells, but the performance of the index is boosted by “survivorship bias” where many poorly performing or closing hedge funds often do not report their performance to the index providers. In addition, there is something called backfill bias. This is where a new hedge fund does not report anything in its first few years, but if it is successful, it reports and backfills its performance data and if it is unsuccessful, it does not report anything to the index providers and quietly dies unnoticed.
Bearing in mind the shortcomings above, plus the regulatory difficulty in investing Cayman Island hedge funds, most advisors only allocate 5% – 10% to hedge funds or “alternative strategies” rather than the 100% that a statistician from Mars might suggest. This provides an eggscellent example of the value-added professional advisors bring to their clients.
Last year the UK ate about 80m Easter eggs, but with the rising cost of chocolate and the increasing health consciousness of the nation, some estimates suggest that the UK will consume about 12% fewer eggs this year compared to last. We hope you get your favourite chocolate eggs this year before shrinkflation means they totally disappear and go the way of the dinosaurs.
Please be aware that the value of investments may go up or down and you may receive back less than you invested originally. Past performance is not a guide to the future.
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