The best analysts tend to be self-effacing, are often cautious in the face of uncertainty and usually hedge their bets a lot of the time. Lacking brazen overconfidence they’re less popular, but they’re the safest hands in the business.
To be honest, investment analysis is a bit of a fool’s game. Short-term trends in markets are terribly hard to get right and going out on a limb and predicting something different from everyone else is a one-way ticket to a new career opportunity. Unsurprisingly analysts are characterised by herding behavior, as they mainly huddle together providing mutual reassurance.
We are fortunate that there are a few intelligent commentators around who, by some fluke of great fortune, have managed to develop a following based around long-term, sensible investing rather than loud self-publicity campaigns. Men like James Montier, Warren Buffett, Jeremy Siegel and Charlie Munger can actually hold a consistent approach to markets over a whole career, rather than a coffee break.
But in general being cautious and careful doesn’t attract many followers. Far better to be big, bold and bombastic – and then to rely on the fact that most people don’t actually keep track of what you say anyway. It’s also useful if you can rely on some big call you’ve previously got right: many gurus have built a whole career on the fact that even a stopped clock is right twice a day.
These fake gods are frequently trading on the Texan Sharpshooter Effect, where the eponymous gunman paints on the target after he’s finished shooting. Finding evidence to support any particular point is often quite easy – it’s finding and justifying disconfirming evidence that’s the challenge.
Unfortunately finding and following people with big reputations is one way in which we ease ourselves of the burden of thinking for ourselves. Because in some arenas we need to rely on expert judgement – we’re generally quite poor at diagnosing our own illnesses, for instance – then we can easily be fooled into thinking investment advisers of all kinds are experts.
Well, some are, but many aren’t. Even in medical matters we’re usually far better off taking second or even third opinions, because doctors make errors. We should, at the very least, take the same approach with financial experts, of whatever hue. Alternatively we need to take the trouble to understand enough about the fee structures and biases of the adviser industry to be able to test the expertise of the experts ourselves.
Investment gurus, whether they’re on TV, in the newspapers or on the internet, are not infallible. They have feet of clay; we need to check they understand that before we trust them with our money.
Further reading:
We've dissected the issues of investment forecasts upon many occasions - see Investment Forecasts: Known Unknowns, Forecasting A Financial Earthquake, and Whither Forecasting? The Butterfly Stirs, for example. Herding is covered in Herd of Investors and The Proper Etiquette For Market Panics while the Sharpshooter Effect is dealt with in Sharpshooting the Investment Gurus. The general inability of experts to forecast anything is handled in Clueless: Meet the Overprecise Pundits and You Can't Trust The Experts With Your Investments.
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Getting a single call right is not necessarily bad. Gary Shilling bet on long-term Treasuries starting in 1982 or so and stuck to that theme all the way to Dec 2008 when 30 years t-bond rates dropped under 3%. I believe he later bought his 30-year t-bonds back when rates rose in early 2010 and has held them since. Talk about a great call!
ReplyDeleteSam Walton basically made single call. Namely, that whoever got biggest and thus lowest-cost in retail first would win big. And that call has made the Walmart heirs fabulously rich.
John D Rockefeller made a similar call about oil and was the richest man of his time.
Most successful entrepreneurs only succeed once. There is a fad in Silicon Valley for calling yourself a serial entrepreneur, but this runs contrary to human nature. There is an age of ambition in every human life. Once we pass that age, we are unlikely to make a big success a second time around.
If succeeding once is okay for entrepreneurs, why isn't it okay for investment advisors. To me, the smart investment advisor is the one who keeps his mouth shut until his time arrives. The time when he sees something the crowd doesn't see, bets big on this insight and makes his fortune. After making this killing, the smart investor cashes out and put everything into t-bills, TIPS, index funds, or whatever and moves on to the next phase of life. Someone who insists on constantly succeeding as an investor immediately arouses my suspicion.