The Wrong Kind Of Expert

The Wrong Kind Of Expert

It’s January and my email inbox is once again flooded with capital market predictions for 2020. Looking back at the “expert” predictions for 2019 made last January, the majority as usual turned out to be wrong. Rather than sharing those predictions that were most egregious (which would be more fun than educational), I thought this year I’d help identify those experts of which you should be especially wary. I categorize them into three types:

  1. Experts who know they can’t predict the future.
  2. Experts who don’t know they can’t predict the future.
  3. Experts who don’t care.

If you must pick one to follow, I’d recommend selecting someone from category #1. They are for the most part economists and analysts who are paid to do the difficult job of estimating all kinds of future targets, from stock market indices to oil prices to trade balances. The honest ones understand the challenge and their own limitations and generally come up with models based on historical data and other factors that they believe have a bearing on their forecasts. You can tell whether or not an expert fits into this category by how he/she communicates. Such experts will inevitably hedge their predictions using ranges, likelihoods, and/or qualifying statements (e.g. if so and so happens then the chance of so and so will be much greater). They will make it clear that there is not a lot of certainty. That approach also makes it easier for them to explain the inevitable mistakes that occur.

The experts who believe they can predict the future operate from biases such as overconfidence. You can recognize them through their more definitive guesses (e.g. the market should grow by 20%) as well as by the strength of their defense of any incorrect prognostications. One example is John Hussman, an economics professor who manages several mutual funds. He correctly called the 2008 market crash, which led to an influx of over $6 billion into his flagship Hussman Strategic Growth Fund. However, since that time he has consistently and emphatically asserted that another major crash is just around the corner, consequently eliminating most risky holdings from his fund. As a result the fund has lost over -7% annually through 2019 while at the same time the S&P 500 was gaining over 13%. It’s his steadfast refusal to admit he’s been wrong that puts him in category #2, arguing that his timing is just premature. That’s pretty specious. Causing investors to underperform by 20% on average for nearly a decade cannot be explained by bad timing. Not surprisingly, Hussman’s fund’s assets have shrunk some 95% since their peak.

The category #3 experts have other agendas than providing useful advice. They are salespeople who know how to sell. For media pundits like Jim Cramer it’s all about getting people to watch his show, not about picking the right stocks. For mutual fund managers it’s about getting people to invest in their funds. Which is more compelling: telling you that they’re unsure about the return or the risk you should expect or instead confidently announcing that their fund is expected to return over 15% in the current interest rate environment?

Study after study has shown that guessing the flip of a coin is more accurate than so-called expert predictions. If that’s the case, why do we listen to them? It’s because as human beings we loathe uncertainty, and they provide at least a veneer of certitude. Unfortunately the more confidence an expert exudes the more likely he/she is to be found in category #2. And there’s no accountability since they continue to offer new predictions regardless of their track record.

Please take any future predictions you hear from any source with a grain of salt. The cost of such free expert advice may be a lot higher than you think.

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