Successful investors are modest. Overconfidence is dangerous.
When I started writing this blog more than ten years ago, I did not think I was an expert on everything. My investment success had more to do with my ability to recognize the expertise of others. I have given examples of what I learned from cab drivers as well as from sophisticated model developers. Nearly everyone has interesting information. You can often learn just by asking, “How’s business?”
This is in sharp contrast to the behavior of most investors. It is just human to be impressed by people who make confident predictions of extreme events. Doing some fact-checking is difficult. Most people spend more time choosing a refrigerator than picking a stock.
But let us turn to a really serious decision — setting your fantasy football lineup!
[I know from my teaching experience that going to a problem in a different context is a great way to put our biases aside. Even if you are not a sports fan or fantasy enthusiast, you will understand the point].
The fantasy sports business is popular and profitable. Players, even those risking only a few dollars, spend many hours researching choices for their weekly lineup. There is a cottage industry of experts — people who crunch numbers, do podcasts, and sell related services. Suppose that we wanted to choose the best source from among the following:
- An articulate newbie who had a new system that identified top players from the past weeks or years.
- A great-sounding source with football knowledge but no track record.
- Someone making less spectacular claims, but with a real-time record of reasonable success.
You can probably guess who gets the business. Let’s turn to investment information.
Eighteen months ago I reported my enthusiasm about a great investment book:
Investors can be better consumers of this information with a little help from two insiders, Josh Brown and Jeff Macke. During my vacation I finished reading their entertaining and informative book — Clash of the Financial Pundits: How the Media Influences Your Investment Decisions for Better or Worse. I plan to do a complete review, but it is especially timely right now.
As you watch or read the news next week, you should realize the pressure on pundits to be bold, dramatic, and confident – even when their forecasts are a bit shaky. The financial incentives range from selling products to building a big reputation. Their analysis of these forces is supported with some compelling evidence from both history and interviews. Reading this book is inoculation against hype, and it is also a lot of fun.
It is now time to put this great advice to use!
Think back to the bogus fantasy advice.
- We are seeing a rash of “instant experts” on recessions. Most of them are cherry picking a single variable. Those with stronger methods do data mining to fit several variables. There are at least a half dozen sources currently preaching doom and gloom.
- Many of the sources are from “credit desks” writing to their current clients. They are selling bonds.
- Some sources are singing an old tune, enjoying their fifteen minutes of fame.
- None of the confident voices have any record at recession forecasting. CNBC posts their “street cred” but never shows a track record on this key subject.
- The most successful recession forecasts get very little visibility. I did a massive search five years ago, inviting nominations. One key source, Bob Dieli, has had the best real-time forecasts for decades. Other top analysts have analyzed past data with great care to avoid data mining. I have a helpful resource on recessions here, and update the key information weekly.
The Choice of Experts
A CNBC anchor was conducting a recession discussion among a number of other anchors and one trader. She noted that most of those forecasting a recession were traders, while economists had a different conclusion. No one said much, but it was certainly accurate. There is a divergence between those following commodities and those following economic data.
It is a shame that the best experts on recession forecasting are not getting more publicity — right now, when it really matters for investors. There is probably no question that is more relevant.
Conclusion
Stock prices for economically-sensitive sectors are, in many cases, already at recession levels. Oil prices are viewed by many as a sound forecast for the global economy, despite increasing energy demand. The hot money understands this oil price correlation — both HFT algorithms and human traders. The average investor infers from the market action that the recession theory is correct.
In the short term, this is the trade. In the long term, investors should prefer real data and a genuine track record to the bombast of newbies.
And finally, I’m going with Aaron for my fantasy team this weekend!