Numbers are a key part of investing. They reveal whether a company is fundamentally sound, if an investment is under- or overvalued and how much risk is being taken, among other things.

Making good use of numbers is one of those activities where, to paraphrase Warren Buffett, there is a diminishing reward for having an IQ above a certain level. The ability to put numbers into perspective and understand which numbers should be given greater importance matters far more than your understanding of how to use a complex mathematical equation like the Black-Scholes options pricing model.

Often the numbers worth focusing on aren’t the ones frequently discussed in the headlines. I’ve made this point when my wife and friends have brought up COVID-19 (coronavirus) in conversation. The sound bites about the virus have so far mostly focused on the number of people infected in China and the total number of deaths. Both are big, scary numbers. They matter greatly if you or someone close to you has the coronavirus. For most other people, perspective is needed.

The estimated population of China is nearly 1.4 billion. As I write this in mid-February, there are 72,300 reported cases in the country. Dividing 72,300 into 1.4 billion shows 0.005% of those residing in China having confirmed cases. Then there are the global numbers. Outside of the eastern Asian region, there have been fewer than 100 people infected worldwide. Sadly, these numbers will be higher the day after we go to press, but they show how much even a little bit of perspective can change how you look at a number.

Epidemiologists pay attention to R0 (pronounced “R naught”). R0 is a basic reproduction number that indicates how many people an infected person will infect on average. If you understand compounding, you’ll understand R0. When R0 is 1, a person with the virus will, on average, only infect one other person. An R0 of 2 suggests an infected person will pass the disease to two other people. Those newly infected people may infect four other people who then may infect eight other people and so on. Hence, R0 is more telling about the chances of the virus spreading than merely the number of infected people reported each day (though the location of where people are infected matters too).

COVID-19’s R0 number has yet to be well-publicized because the absolute number of infected people requires little explanation and is easy to understand. Plus, people prefer a specific number than a range, like the R0 of between 1.5 and 3.5 estimated by the Imperial College London as I write this.

Tying this back to finance, one of my ongoing pet peeves is how point moves in the Dow Jones industrial average are frequently reported. A 200-point move in the blue-chip average continues to be treated as a big daily move. Words like “surges” or “plunges” are frequently used to describe it. These superlatives overshadow the fact that a 200-point move equates to a 0.7% change, which is well within the realm of normal volatility.

It doesn’t take advanced mathematics to figure this out, but it does require the ability to separate yourself—and your emotions—from the headlines.

One of the ways I think investors can avoid letting the headlines influence their emotions is to simply have a long-term plan for how they allocate their portfolio and how they manage it. Rebalancing is one such method. At the end of 2019, one of the models I’ve been tracking issued its first signal to rebalance in six years. I discuss what prompted the signal and what it means from a tax standpoint here.

We also feature some perspective on investing from Chuck Schwab. I spoke with the discount broker pioneer about commissions, his investment style, bubbles and more. You can find it here.

For our Retired Investor column, I asked Michael Falk to contribute an article about end-of-life planning because of his ability to think outside of the box and his expertise about investing. Michael’s two most recent books “Get to Work … on OUR Future” (self-published, 2019) and “Let’s All Learn How to Fish ... to Sustain Long-Term Economic Growth” (CFA Institute Research Foundation, 2016), offer recommendations for how to improve a wide range of economic and governance issues. As you read his article here, you’ll see why Michael has a very personal perspective on the subject.

Wishing you prosperity and good health,