Experts are the Worst Predictors in Times of Uncertainty

By: Larry Cyna | Mon, Nov 5, 2012
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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 Investor

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.



Larry Cyna

Author: Larry Cyna

Lawrence J. Cyna, CA

Larry Cyna

Larry Cyna, CA, is CEO and Portfolio Advisor to Cymorfund, a boutique hedge fund. He expresses his insights several times a week on his blog and offers a free newsletter which can be subscribed to here.

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and is a strategic consultant to selected clientele.

He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC's with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section.

He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder's Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants.

He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm.

Mr. Cyna is well known in the Canadian Investing community. He attends presentations given by public companies to the industry on a daily basis.. These presentations are intended by the various hosting companies to present their inside story for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being in constant communication in this manner keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.

Mr. Cyna is currently a Director of Argentum Silver Corporation and Telehop Communications Inc.

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