Your Belief In The General Wisdom Of Experts May Be Mistaken

hear no evil, friends, see no evil,

Flickr / C. Pajunen

We Have Met the Enemy and He is Us is the title of a 1972 Pogo book written by Walt Kelly.Investors have many unlikely enemies, including themselves, but I am not really blaming you for the dismal investment performance many people have incurred over the last decade or more.

The core problem is two-fold:

  1. You have a mistaken belief in the predictive powers and general wisdom of “experts”, and follow their advice.
  2. You believe information from credible financial sources in the media. When they make predictions, you assume you can rely on their reputation and overall expertise.

Unfortunately, both assumptions are demonstrably false. These experts, and much of the financial media, are both stealth enemies. You would be better off paying no attention to them. Let me give you some glaring examples, both in the U.S. and elsewhere.

How difficult do you think it would be to predict the action of the Federal Reserve Bank in a country that accounts for only 1.49 per cent of the world economy, on the morning of the day when it was scheduled to meet? If you had doubts, and were concerned about your reputation, surely you would hedge any predictions you were making in your newspaper, right?

On February 7, 2012, the highly respected Sydney Morning Herald made this flat statement: “A betting plunge on financial markets puts an interest rate cut today as good as certain with weak retail sales figures indicating the worst growth on record.”

There’s no misreading the confidence of that report. “As good as certain” is something you should be able to trust. So, what happened? The Reserve Bank decided to leave the interest rate unchanged. The media noted this decision was “the opposite of what pretty much all of us thought was a certainty.” If you relied on the media and invested based on your assessment of how a cut in rates in Australia would affect your stock or bond holdings, you woke up on February 9 with a massive headache.

Surely, you can rely on the reported views of economists at the largest U.S. banks. These are the people, who by training and the importance of their positions, have their finger on the pulse of the world’s markets. The media eagerly reports their predictions, and many investors rely on them in making buy and sell decisions.

According to an article in Bloomberg, you might as well be relying on Bozo the clown. Here are their efforts to salvage some credibility:

  • Larry Hatheway, the chief economist at UBS AG, conceded his prior estimates of the prices of global shares and high-yield bonds (made only two weeks earlier) were “wrong but not too late.”
  • Strategists at Bank of America, Goldman Sachs, and Barclays were surprised by the 5.7 per cent rise of the MSVI All-Country World Index. They had all forecast first-half losses.
  • Benoit Anne, the global head of emerging-markets strategy at Societe Generale (GLE) SA, admitted its estimates for developing nations were also wrong. Anne observed: “I got stuck with my defensive views for too long.”

A more accurate observation for all of these financial psychics would have been: “We should get out of the prediction business because we can’t predict tomorrow’s news and that’s what drives prices.”

I refer to this faction of the financial media as “stealth enemies” because you don’t immediately appreciate the danger they pose. They position themselves as your trustworthy friend and guide, serving your needs by dispensing valuable information you need to make intelligent decisions. Nothing could be further from the truth.

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