integrity of financial information

I take issue with the quality and the integrity of the financial information made available to the public, especially when it comes to financial graphics.

Issue 1: Most plots of prices over time are not adjusted for inflation.
Everyone knows that a dollar in 1985 is not the same as a dollar in 2005 because of inflation over time. In fact, something that cost $1.00 in 1985 now costs $1.77 in 2005. Or, if you want to look at it the other way, something that you buy for $1.00 in 2005 used to cost $0.56 in 1985. Most graphs you find in print and on the Web are not adjusted for inflation. For example, if you look up the 10-year history of a stock price on your favorite financial website, the prices plotted on the graph are nominal prices. That is, they plot the 1995 price in 1995 dollars, plot the 1996 price in 1996 dollars, etc. I can't see how anyone can make an informed decision like this. Instead, they should plot all the prices on the chart in 2005 dollars. In other words, they should plot the real prices. It's the only way you can get a frame of reference to make an informed decision. One quick example, let's say you bring up a stock chart and you see that the stock price was $0.56 per share in 1985 and the stock price is now $1.00 per share in 2005. The summary tells you that the price increased by 79% over 20 years, or is growing by an average of 3.9% a year. Not the best return you figure, but at least you didn't lost money, right? Well actually, you didn't gain any either. Adjusting for inflation, the stock price in real terms stayed the same over 20 years. So, imagine this in a graphic, all of the trendlines would be shifted up more than they should be, giving an impression that the stock is better than it really is. I wish I had some side-by-side examples to show, and I'm surprised that I couldn't find any on the Web, but I'll try to get some data to plot and make an example to post for everyone. In the meantime, here's a factoid: in real prices, gasoline at the pump today is cheaper than it was in 1980. In 1980, the nominal price of gasoline was $1.26 per gallon. Adjusting for inflation, the real price of gasoline in 1984 is $2.87 a gallon. You're still paying less for gas today than you (or your parents were in 1980). Don't get me wrong though, I still wince when the price of gas spikes to $2.50+ a gallon, and it's only natural. When consumer prices are increasing faster than wages are, you definitely feel the pinch of your shrinking purchasing power.

Just remember, when you are looking at a financial graphic being plotted over time (stock prices, mutual fund returns, gas prices, etc.), ask yourself whether or not the prices have been adjusted for inflation. The caption will always note if the graphic is "adjusted for inflation" or in "real prices." Only one publication I read consistently plots real prices, and that's The Economist.

Issue 2: Government (or group) spending is not reported/plotted per capita.
When people report on government spending, they first fail to adjust for inflation, then they fail to adjust for population. That is, they should report spending as a dollar per person amount, not just as a pure dollar amount. I'm not one to support the ballooning of government spending, but I see this tactic used by groups who have an interest in cutting a program. It's easy to publicize a 20 percent increase in spending, but if the population increased by 20 percent, spending per person remains constant. Again, only after figures and charts are adjusted for inflation, then for population, can citizens make informed decisions on how they want their government to spend their tax money.

Issue 3: It's not easy making your inflation-adjusted plots.
I only wish there were a preprogrammed formula in Excel to adjust for inflation. To make a real plot, you have to get the Consumer Price Index data from the Bureau of Labor Statistics and enter your formulas in from there. For the simple calculations, The Inflation Calculator is pretty helpful.

Issue 4: Narrow stock indexes are used to measure the entire stock market.
In almost every investing primer I've seen, they show a plot of the S&P 500 index for the past 50 years while the narrative describes it as the performance of the U.S. stock market in general. The S&P 500 represents the 500 most widely held companies and each of the 500 stocks in the index are weighted by market capitalization. Although the S&P 500 is a good measure of large-cap stock performance, large-cap stocks only account for about 70% of the U.S. stock market. Even worse is the Dow Jones Industrial Average (DJIA or "Dow") that gets reported daily on the radio and television. The Dow Jones Industrials are 30 companies picked by The Wall Street Journal, all large-cap (GE, Microsoft, etc..) and the DJIA is a weighted average of their stock prices. The "Dow" is sort of a tradition as it's been around since 1896, but it doesn't really measure the performance of the U.S. stock market as well as it measures the performance of the top "industrial" stocks in the U.S., well according to the judgement of the Wall Street Journal. But somehow, the Dow is perceived as a reflection of how all stocks are performing in the U.S. So if the S&P 500 measures about 70% of the stock market, and the Dow measures even less, what measures the 30% of mid-cap, small-cap, and hodgepodge of other stocks? The Wilshire 5000 index (officially known as the Dow Jones Wilshire 5000 Total Stock Market Index) is an index calculated using all publicly traded stocks in the U.S. stock market, weighted by market capitalization. At the index's inception in 1974, there were about 5000 stocks in the market, hence the name. Today, there are well over 5000 stocks in the market. The Wilshire 5000 index tracks every stock on the New York Stock Exchange, the Nasdaq Stock Exchange, and the American Stock Exchange. So, hunt around for information on the Wilshire 5000 index if you're interested in tracking the total performance of the U.S. stock market or if you're interested in investing in a U.S. index fund with maximum diversification.