Experts with the ‘X’ factor
Posted on June 20, 2007 by Richard Beddard
Filed Under Markets, Reading list |
Robin Soole, a reader of this blog, is unimpressed by financial journalism. In the following quote he added his own merciless annotations to a reply from an editor advising a reader after one of his magazine’s recommendations lost money:
“All Japan funds lost money in 2006 [ed - yep, but your recommendation lost more than any other] Most Japan watchers expect the markets to recover [ed - yeah right]… You need to be confident that Hideo Shiozumi [ed - who?] can restore the funds fortunes, otherwise you should consider switching to another Japan fund [ed - how about another sector matey!].”
Assuming that’s the full extent of the editor’s reply, I suppose, having received a bum tip, the reader is entitled to more concrete advice about what to do next. Whether he’d be wise to take it is another matter. To the magazine’s credit, at least it tried.
A lot of financial commentary is bullshit, and a lot of its wrong. Apparently that is fact. A new book “Expert Political Judgment: How Good Is It? How Can We Know?” measures the performance of political and economic pundits and finds them wanting. This is from a review in the New Yorker*1:
…people who make prediction their business—people who appear as experts on television, get quoted in newspaper articles, advise governments and businesses, and participate in punditry roundtables—are no better than the rest of us. When they’re wrong, they’re rarely held accountable, and they rarely admit it, either. They insist that they were just off on timing, or blindsided by an improbable event, or almost right, or wrong for the right reasons. They have the same repertoire of self-justifications that everyone has, and are no more inclined than anyone else to revise their beliefs about the way the world works, or ought to work, just because they made a mistake.
According to the review its author, Philip Tetlock, a psychologist, studied 284 pundits over 20 years. In that time, they made 82,361 forecasts. Most of them, it seems, wrong. Perhaps more surprisingly, the more well-known, self-confident, and (”beyond a certain point”) knowledgeable the forecaster, the worse his predictions.
From time to time I quote experts in this blog, something I do with mixed feelings. On the one hand, it’s necessary because I don’t know much and I’m not that interesting. On the other hand, I too am sceptical of experts.
The expert I quote most often is Ken Fisher. His view of his fellow pundits is similar to Mr Tetlock’s. Ken is the top market forecaster according to CXO Advisory Group, a site I like to quote because of the apparent objectivity of its research. Ken’s approach to forecasting is to plot rival forecasters on a bell curve and plump for the most likely scenario that isn’t the majority view, although he’s refined the technique now rivals are imitating it.
I know it’s cute, picking an Interactive Investor columnist as the exception that proves the rule when I am the editor, but I read their articles week-in, week-out I know the Interactive Investor ones best. Peter Temple is another. In the financial arena there is a benchmark for punditry, if only it were more often measured, and that is the the pundit’s returns. All five of of Peter’s model portfolios are beating the stockmarket, most by large margins.
My purpose isn’t to big up Peter and Ken*2, it’s to point out why I think they’re good pundits. The fact that they’ve been right, is coupled with something else they have in common, that makes them worth reading and that is of much greater interest to me. They show their working out.
As an investor, I read a lot too. But I’m not looking for information about what to buy. I’m looking for information about how to invest: the profitable strategies, what worked in the past and why it worked. What factors drive markets and shares. I’m constantly updating my own theory of investing as a result of what I’ve read. The practice of investing, though, the fact that I bought shares in Kohls last week, is entirely down to me. I don’t buy Ken’s recommendations, and I don’t buy Peter’s, but I do learn from them. A pundit that says ‘what’ he thinks, but doesn’t explain ‘why’, is as useless to me as a pundit that is habitually wrong.
On the financial bulletin boards investors often sign-off “Do Your Own Research” or just “DYOR”. It’s meant like a disclaimer, meaning “if I’ve got it wrong, don’t blame me!” The editor in the quote we started with was saying the same thing. “You need to be confident…” sounds a lot like “Do Your Own research.” In a sense it was good advice, though not, perhaps, what his reader expected.
Footnotes:
- I found this review on Marc Andreessen’s blog. Mr Andreessen famously developed Netscape, the browser that popularised the Internet. His blog is newer and rather brilliant, and although it’s not principally about investment, I’ve added it to our blogroll
- I feel a bit shabby only mentioning two of our own columnists. I do read the FT’s My Portfolio (Peter Temple is one of four investors who write it) and Alistair Blair’s No Free Lunch in the Investor’s Chronicle. They don’t publish track records, or necessarily recommend shares though. Feel free to nominate other experts with the ‘X’ factor in the comments form!
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4 Responses to “Experts with the ‘X’ factor”
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This is one of the best commentaries on investing I have read in a long while. I have recently retired and am in the process oftrying to switch to more active managmentof my investments to maximisemy retirement income. What I do not want is “experts” telling me where I should invest. What I need is good advice telling me how to make the decisions myself. From what I have seen so far I too am a fan of both Ken and Peter.
This article sums up invetsting. When someone quotes DYOR do they actually have expert knowledge the business or the sector in which they’re investing? 99.9% of the time I would guess they don’t. Investment decisions(’Gambling by elimination’, as I prefer to think of it), are only valid at the time of the decision and from then on are subject to all kinds of world, market, and political events of which the investor has no control.
Bob, TTP, thanks for your comments. Nothing to add
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