If the events of the last few years have taught me anything, it is that when it comes to the capital markets, there are very, very few experts. Sure there are lots of people in this space that benefit greatly by our believing that they are experts, driven mainly by a lack of confidence in our own abilities in this space. But what I’ve come to recognize is that the same forces that cause us to question ourselves should fuel a healthy dose of speculation about the “experts.”
Sure they have more sophisticated analytical tools, impressive brochures, websites and offices. They can produce statistics that attest to their expertise (usually focused on the periods that they got it right) and have well developed sales tools. But where do they keep the crystal ball? Most of us know, intuitively, that past performance is no guarantee of future performance (you can’t drive a boat by looking at the wake) and the experts are quick to advise us of this fact. And then they show us a raft of statistics from the past.
Or else we get introduced to some complex financial model that we can not hope to understand. We nod our heads knowingly, unwilling to admit we don’t have the slightest idea of what they are talking about. If it’s that complicated, there must be something to it, right? Except inability to understand a concept is one of the foremost reasons not to invest in something, at least according to the consensus number one investor, Warren Buffett. By the way, did you ever notice that when he speaks, he sounds a lot more like us than them?
So with this rather cynical perspective, I read an article in today’s WSJ with great interest. It cited three experts that accurately predicted March would represent the nadir in the stock market. Finally, I thought some truly “expert” experts. Then I read the rest of the article where they predicted three different directions for the market going forward. It occurred to me that it is easy peasy to find three, four or even fifteen experts that agreed, when we look backwards. It’s the predicting ahead thing that’s so sticky. That’s way a vast majority of the experts are outperformed by index funds.
Our deficit of confidence is the greatest asset of the experts. As long as we think that we can’t, we are more likely to believe that they can. I’m not here to suggest that you attempt to become the next great stock picker, because I believe that they are extremely rare, or accidents of circumstances. I only encourage you to take a hard look at how much expertise your “expert” possesses.