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MAKING CENTS OUT OF THE NEWS
Blog #29
(September 8th, 2011)
Listening to Markets, Not Market “Experts”
By Tom McAllister, CFP®
“Unexpected” seems to be the description the mainstream press applies to bad economic news, observed Jonah Goldberg in a column published a couple of weeks ago. Since, he posits, the majority of media commentators want President Obama to succeed, they characterize economic setbacks the government suffers as UNexpected. When the facts contradict their story line of administration success, the “unexpected” label proves a convenient escape.
Dealing with the unexpected is, in my opinion, what leadership is all about. Otherwise we could program computers to run the country, our businesses, and other institutions!
Goldberg further observes that the “experts” upon whom the media call for quotes are also surprised. These tend to be academics, authors, and consultants, highly educated at the “best” schools. The media rely on them for guidance about what is “mainstream” and therefore accurate, and what is not. But, prediction proves very hard, even for the highly intelligent!
This blog post, however, is not about either politics or the economy. It’s just that my observations of the “herd” mentality on Wall Street show that, especially in volatile markets, Wall Street professionals - investment managers, hedge fund operators, short term traders, and even large investment banking firms all behave in a manner very much akin to the behavior Goldberg noticed in journalists.
The fund operators, traders and managers call the “experts” (often paying them a substantial fee) for predictions. These consultants are typically highly intelligent, many have graduated from Ivy League institutions, and they follow the markets carefully. The problem is they also talk to each other virtually all day. “Group speak”, not truth, is the natural result of such interaction.
By contrast, those who, like my heroes John Templeton and Warren Buffett, go against the crowd and the common wisdom, have traditionally outperformed those who follow the “experts” and their prognostications.
After fifty years of studying investments and investors, I cannot fail to notice that predictions coming from even the most credentialed and experienced of these market prognosticators are rarely better – often much worse - than random guessing. Phillip Tetlock once wrote, “In this age of academic specialization there is no reason for supposing that contributors to top journals,
distinguished scientists, area study specialists, economists, and so on, are any better than journalists or readers of their missives in correctly reading emerging situations.” (Tetlock was referring to political prognostications, but I think these thoughts are very apt in the investment and economic worlds.)
Market-based ideologies by contrast, do not have the same problem as journalists and their “gurus”. Markets, you see, expect events in ways that experts never can. So rather than seeking out the opinions of academics and other theoreticians, successful money managers, such as those we use at McAllister Financial, observe and develop their own opinions and predictions, based on what they see in the marketplace. Decades of doing so have given them a “feel” for timing their moves. Along with this “prescience” goes thorough research into the fundamentals of the stocks and bonds they are using in clients’ portfolios.
Wouldn’t you be wiser to listen to the MARKETS, not the so-called market
“experts”?
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