What I’ve Learned So Far- Chapter 1
Take experts’ advice with more than a grain of salt
By Ted Schwartz, CFP®
Well, after 25 years in the investment biz, I thought I would try to distill some of what I have learned so far (for myself and for you). Some has been learned the hard way through trial and error and some has been learned from the help of others without too much pain and suffering on my part. At any rate, I would like to offer some of what I now believe in a series of blogs that will hopefully be of some value to
you.
Chapter One- Take experts’ advice with more than a grain of salt
The single best talk I have witnessed in the investment business was given by Barry Ritholz a few years ago at a conference in Denver. The line that sticks with me to this day is that he referred to the experts and pundits that litter TV screens across America as “articulate incompetents”. His point is that, despite the daily deluge of investment advice we get from brilliant seeming experts, nobody actually knows where
the market will head next in the short term. While I think there are some meaningful conclusions that can be drawn about where one should expect the markets to go longer term, shorter term market direction is a total crapshoot. The market’s short-term results will be largely determined by events that have yet to happen (think geopolitical events, changes in Fed policy, weather, tweets, etc.). The primary mission of the TV cable news networks is to attract eyes. So, an honest expert admitting
that he has no idea of where the market will in a few months is simply not going to get on television. On the other hand, an expert predicting a rapid movement up or down in the market is a welcome guest. On an emotional level, they appeal to either your fear or greed and will keep you watching. They hook you to the screen. If they are right (even if less than half the time!), they will be coming back as the pundit who called the Financial Crisis or who called the bull run after Trump’s election
or…… Never mind that they were wrong on several other calls and that following their advice would have been a poor strategy for you over the long haul.
The difficult part is that these folks are so articulate, so expert, so rational, and have charts and fancy Power Point presentations to back them up. To this day, whenever I listen to them, they seem infinitely smarter than I could ever hope to be and make arguments I cannot even begin to counter. They are so impressive! Unfortunately, they will not provide you with a long term investing strategy that works. Such a
strategy would not make for must watch television. It is a far more boring and patient process.
I hate to single out a few pundits when I think this truth covers almost all of them but, a few examples are illustrative. In 2016, Market Watch’s Jennifer Bolton wrote of a Wharton study comparing a portfolio managed by cable news star Jim Cramer (his Action Alert Plus portfolio available by subscription) to the S&P 500 Index*. The study found that the portfolio from 2001 to 2015 had underperformed the index.
Charitably, they allowed that his portfolio’s performance was similar to most active managers, who also underperformed the index. So, are you better off having him scream at you for a half hour a day or maybe go with a low cost index fund and spend that time meditating? (OK, I don’t really find Jim Cramer to be very articulate, so let’s look at somebody who is).
My 25 years in this business have allowed me to observe well the road traveled by Harry S. Dent. He is a fascinating fellow, a demographer who can dazzle you with what the future holds based on his very insightful studies of population trends. He used his demographic knowledge to come up with his big prediction for The Roaring 2000s and his finding that the Dow would hit 36,000 by 2007 or 2008. More recently he
has been predicting doom and gloom, saying the Dow could fall from its current level by 17,000 points. Dent is articulate, charismatic, and extremely knowledgeable about demographic trends. His appeal was so large at the turn of the century that a large mutual fund company offered a mutual fund based on his demographic trend predictions. Money flocked to the fund, which was a poor performer in light of the Dot.com crash of the early 2000s. Eventually the mutual fund company shuttered the fund
and merged it into a different fund. Perhaps Dent’s current predictions of market doom will prove prescient and we will see a tremendous tumble in the Dow as he predicted. His bullish prediction from before the tech crash has yet to come true after all these years. As of now, a broken clock (which is always right twice a day) is way ahead of Harry S. Dent in its ability to predict the near term future.
The other great observation made that day by Ritholtz was that most experts are “post-dictors” rather than predictors. There are now lots of experts who can tell you why the financial crisis of 2008-2009 took place. Very few if any of these experts offered similar explanations before the crisis. Similarly, most analysts who make stock recommendations make their changes after earnings reports. So, they tell you after
stock rises or falls in price due to a good or bad earnings report that you should have a new target price for the stock. This is akin to predicting yesterday’s baseball scores and thinking that today’s game will end up the same way.
Am I saying you should “tune out” the pundits and experts entirely? My answer would be it is OK to listen if you enjoy these folks, but I would try not to react much or at all. I confess there are experts that I definitely listen to after 25 years. These experts are all articulate and make great sense when I listen to them. However, I try not to act on their advice to any of their short term market
calls, instead preferring the boring path in which you weigh risks, chart a course for the long run, and ignore the “hot” ideas coming to you 24/7 from the smart folks on cable news.
