Experts are the Worst Predictors in Times of Uncertainty
Today, We Debunk Some Myths
There is a large industry of media types that talks incessantly of what to do in the stock market, or what is expected and therefore how you should trade, or what you should buy or sell. All of this activity is generated by people wanting to know how to make money in the stock market, and the media responds (as they should) by providing content from "Experts".
In our last blog, we gave some basic rules that usually ensure success in investing. Today, we reprint an article from a leading academic source that points out in a scientific way, exactly what we have been saying.
"Experts are among the least successful predictors in times of massive uncertainty"-Harvard Business Review, HBR Blog Network, Keep Experts on Tap, Not on Top
Among the many qualities that distinguish successful leaders from millions of less-successful executives in the world is an awareness of the limits of their knowledge. They know what they know, they appreciate what they don't know, and they have a healthy respect for what they don't know they don't know. In short, they have great meta-knowledge.
Meta-knowledge can be thought of as a lack of hubris, an intellectual humility of sorts. Those who see the world probabilistically seem to better navigate volatile environments because they are wired to embrace uncertainty. They understand that they don't know anything with 100% certainty and are therefore open to ideas different from their own.
The psychologists Daniel Kahneman and Amos Tversky demonstrated quite convincingly that we human beings are not the model-optimizing "rational" actors that many economists historically believed we are. One of their key findings was that humans are consistently overconfident, suggesting that we generally have poor meta-knowledge. We tend to think we know more than we actually know. A corollary of this result is that we also tend not to know what we do not know.
In my experience, experts are among the least successful predictors in times of massive uncertainty. This is not to suggest that experts don't have significant and valuable knowledge; quite the opposite, they likely do. Rather, it implies that they think they know more than they actually do and therefore exhibit more confidence than is warranted. The result: a significant number of very visible expert predictions have gone embarrassingly wrong.
Consider for instance, two books that made it to the top of the bestseller lists: The article goes on to compare some predictions of renowned experts to the eventual outcome, and the predictions proved completely inaccurate.
Lest we conclude it's only doomsday experts that miss the mark, it's worth highlighting that Yale economist Irving Fisher noted on October 17, 1929 that "stocks prices have reached what appears to be a permanently high plateau," a few mere days before the Great Crash welcomed the Great Depression. And of course, there's James Glassmann and Kevin Haskett's Dow 36,000, published in 1999, mere months before the Dow Jones Industrial Average began a slow, long, and painful decline.
Many of these "experts" adopted single-discipline approaches to developing insights; they were, to use the language of my prior HBR blog post, "specialists." They were truly knowledgeable within their domain, but it was often developments outside of their domain that derailed their predictions. They failed, it seems, to have a broad enough perspective.
Generalists, on the other hand, are those who have broad knowledge but lack deep domain expertise. Most generalists do not claim to be expert at anything, making them psychologically more receptive to ideas distant or different from their own. They are, it seems, more aware of what they do not know and understand that there is a large body of information that they do not know they do not know.
Basic Instincts of Human Remain Constant - Remembering this Makes You a Better
The Generalist Attitude of the CymorFund has stood the test of time. We published some simple rules of investing in our last blog, and now we publish the underlying understanding of economic behavior.
First - There have always been economic cycles that rise and fall. As far back as records were kept, even before modern currency was adopted, cycles started, progressed, rose to unsustainable heights, and crashed. Then another cycle started. We are now entering a new economic cycle. Letting the train leave the station without you on it, is a mistake.
Next - New cycles are started, or ended by scarcity, or need, or new invention, or greed of our fellow man. What happened in the last cycle permanently hurt many people. If they give up, they are left behind. Just remember, hope springs eternal, and never give up hope.
Next - Good value in never recognized as being the same value throughout the economic cycle. This is how Warren Buffett became so wealthy. He recognized that a good company is good and will continue. He bought shares in these companies when all others were selling them and the price was depressed. This is a simple concept that we have written about often. As Baron Rothschild said "Buy when there is blood in the streets."
Next - a good company that has a fair value of $100, will be worth $1,000 at the height of the madness, and $10 at depths of despair. Real value is rarely reflected in the stock market price. But it is the same company, just in different economic circumstances.
Next - which brings us to our last comment. A good company has more than a good product, or a good project, or large distribution, or good management, or all of the other criteria for success. A good company must have sustaining power. That means large cash reserves or the absolute ability to acquire more cash. Companies fail because they failed to provide for the lean years when they were in the midst of plenty.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.