Ratios, Metrics, Key Indicators

A fascinating article on L.A. Dodgers pitching ace Clayton Kershaw’s pursuit of an obscure but astonishing baseball record, illustrates just how powerful ratios – or key indicators, KIs, KPIs, or whatever else you want to call these metrics – can be in sports, business, personal finance, and many other walks of life. It also shows how such metrics should NOT be used.

With one game left in the Golden State Warriors’ NBA regular season, their MVP Steph Curry has a chance to score an astonishing 400 three-point field goals this season. This remarkable accomplishment underscores why business metrics, and especially ratios, are such a powerful tool for understanding business trends and achievements. Here’s why:

The Powerball payout has reached the jaw-dropping, mind-numbing (insert your favorite hyper-adjective here) level of $1.4 billion. I must speak: state lotteries are one of the most sinister and unfair ideas our elected officials have ever had. And simple, straightforward numerical thinking would have clarified everything. Let us count the reasons why I feel this way:

A “Washington Post” story has the Merit Systems Protection Board (MSPB) trying to rebut a number of misconceptions about federal government employment practices, most notably the belief that it’s impossible to fire a federal employee. Their effort is a great example of how misleading raw numbers can be, and how the misuse or simply the absence of metrics can rob the raw numbers of meaning and context.

In a Washington Post op-ed piece, Catherine Rampell takes on presidential candidates pledging to “run government like a business,” as they advocate inane policies like 10% across-the-board cutbacks. She identifies several federal government situations where they should be spending more money, not less. She’s right, but it’s not just about spending money to make money. Well-run businesses use metrics intelligently.

I love metrics. I love keeping score. And as a lover of metrics, I was delighted by the Bipartisan Policy Center’s announcement yesterday of a new metric: the Healthy Congress Index (HCI)! But as enthusiastic as I am about this new metric to assess the productivity of the U.S. Congress, there’s a fundamental problem that the BPC really needs to address.

I try to be positive. I really do. But yesterday I came across a post that is so ridiculous that I can’t stay silent. The writer observes that in every year since the Chicago Board Options Exchange’s Market Volatility Index (^VIX) was created in 1986, if the VIX traded at more than 34% above its one-month low at least once during the month of December, the S&P 500 showed a gain from that point until the end of the year. (Got that? There will be a quiz on this later.) The writer claims to have found a predictor “whose results have been so overwhelmingly consistent that it is hard to ignore.”

In my last post we looked at using a table, instead of a graph, to present a more complete, precise, and arguably understandable picture of how the composition of the U.S. House and the president’s party interrelate. And we were still able to take advantage of data visualization! This time, let’s take a look at using one of the most powerful tools in the quantation arsenal – the humble ratio – to really get a message across.

What are metrics for? When properly used, most are nothing more than a relative tool for comparing one time period – or company, or country, or person – to another, or actual results to planned or expected results. They are not an absolute score, meaningful on its own.

Developing scorekeeping metrics is a critically important yet undervalued role of the chief financial officer. CFOs ignore this role at their and their organizations’ peril, because if they don’t set the scorekeeping metrics, others will, and will make a mess of it.

“How Useful a Measure Is GDP?” is a thoughtful and thought-provoking article by Diane Coyle. She observes that the concept of GDP has come under fire recently by those who argue that it doesn’t really measure well-being – that it doesn’t measure, for example, happiness, or income distribution, or sustainability.

As a financial executive and a consultant, I’ve been a part of or observed endless debates about what is the correct cost of capital to use in evaluating a project’s net present value (NPV). And I have to ask: Does this debate really matter?

At this holiday time, what could be more festive than driving all over the place in your car? Of course, at today’s gas prices visiting far-flung friends & family can be expensive. A partial solution is to drive a few miles out of your way and buy cheaper gas.

I recently downloaded a Wall Street Journal article about the congressional food fight over spending and the debt ceiling. I learned that “on Oct. 17 [the Treasury] would be left with only about $30 billion.” I went on to learn that this amount was approximately equal to the Harvard University endowment in 2011, and the cost of Hurricane Ike in 2008.

Big news! The formerly humble percentage sign has received the coveted “Symbol of the Year Award” from the Stanford University Symbolic Systems Program. Well, OK, the percentage sign received the first such award. The announcement came on last Saturday’s Weekend Edition, in a visit from Keith Devlin, NPR’s “Math Guy” and himself a math professor at Stanford.

In last week’s post, we discussed using metrics to help understand past and forecast spending on Social Security (SS). These metrics are important because it’s hard for anyone to grasp raw numbers this large — annual SS benefits are expected to top $1 trillion (yes, trillion!) around 2018, for example. So metrics like spending as a percentage of GDP help to put raw numbers in some context.

In the current debate about the U.S. federal government’s fiscal predicament, there is much rhetoric, from both sides of the aisle, about the need to “rationalize” and “simplify” the federal income tax code, and lower tax rates in the process. The real issue, of course, is the deficit, and the only way to reduce a deficit is to either spend less or tax more. So how can “lowering tax rates” help solve the problem?

The word for today is context. Yesterday’s New York Times ran a story about a bill in the New Jersey state legislature about to become law, which will reduce the state’s cost of benefits for government employees and retirees. The fiscal condition of the states is a burning issue nationwide, and deserves a clear and concise airing for interested citizens.

In an ExxonMobil TV ad supporting the National Math and Science Initiative (NMSI), the voice-over says that “high schools. . . enrolled in the NMSI have raised AP test scores by 138%.” ExxonMobil reasserts this claim on their corporate website.

Happy New Year! Today’s post is about an easy way to quickly estimate annual return for very high returns over several years, without needing a calculator. My New Year’s wish to you is that this will actually be useful to all of you, and soon.