Hi Guys,
The markets have made a few wild swings this past week. That volatility, mostly on the downside,has put investors on notice and their fear index is on the ascent. Is the market action a transient perturbation or is it a signal of a major directional shift? Who knows?
Is it the Madness of crowds or the Wisdom of crowds? Many will seek an answer from experts, but how reliable are these experts?
In all likelihood, it depends. It depends on how the expert crowd is constituted. To avoid the madness of crowds trap, the crowd members must be independent, must represent diverse backgrounds, and must not succumb to the groupthink of a dominant member.
Within the month of June, Paul Farrell has written two separate pieces that present both sides of the equity market opinion spectrum. It is a clash of Titans.
Most recently, a segment of the Lazy-Man portfolio managers that Farrell assembled has proffered an optimistic assessment. From their perspective the equity marketplace is still the place to be.
They totally disagree with Paul Farrell and his earlier group opinion with respect to market returns for the remainder of the year. Here is a Link where Farrell forthrightly records the positive projections formed by four members of his Lazy-Man cohort:
http://www.marketwatch.com/story/lazy-portfolio-creators-remain-stock-bulls-2013-06-22For fairness and balance, here is the doom and gloom earlier article that prompted this contrary assessment:
http://www.marketwatch.com/story/doomsday-poll-87-risk-of-stock-crash-by-year-end-2013-06-05This doomsday poll included 10 well respected investment and financial wizards ranging from Warren Buffett and Gary Shilling to perennial pessimistic critics such as Nourial Roubini and Peter Schiff. The four Lazy-Man portfolio mangers take exception.
To illustrate, a ubiquitous concern shared by many wizards is the escalating climb of debt within the US. They often cite the public debt rise, but often ignore the more troubling private debt which is three times the total of the public sector. Now that’s a real long-term issue. Many market mavens have blamed the failure to mark to market as the primary cause of the housing bubble and its derivatives explosion Later commentary humorously morphed the “to Markets” sobriquet “to Myth”, then “to Model”, and finally “to Make-Up”. The impact of private debt is likely to persist and to influence longer-term recovery. That’s me talking and injecting a random opinion.
This diverse set of expert opinions is not unexpected. It is rare if experts totally concur on any forecasting matter. If it were an easy forecast, expert advice would need not even be solicited. And all experts are not equally skilled, consistent, or trustworthy. Incentives corrupt the honesty of many experts. Who would you trust more, Jim Cramer or David Swenson?
In several recent postings, I’ve focused on the failures of forecasters to forecast. Experts have cobbled together a dismal record. Both reference articles should be absorbed with considerable skepticism. A book written by David H. Freedman titled “Wrong” explores the challenges and shortfalls of expert studies and forecasting. Here is a Link to a WSJ review of that work:
http://online.wsj.com/article/SB10001424052748704009804575309610811148630.htmlI enjoyed the book. Even scientists distort or misreport their findings. Like other professions, a fraction of them are also dishonest and do mischief, sometimes by completely fabricating the data, but more often by stacking the scoring deck. Here is an infamous story presented in Freedman’s book about a college professor who rigged his experimental scoring to validate his theory and practical solution.
The professor claimed to have a procedure to cure the fear of snakes. His final test to validate his “cure” was to expose the client to snakes to demonstrate the efficacy of his work. The scam was that he exposed his clinical subjects to snakes that had been well fed and kept in a refrigerator to make them sluggish and subdued. His test control group members who were not treated were similarly confronted by snakes. However, these snakes had not been fed, and were kept in a heated environment to make them significantly more aggressive. The resultant end statistics of the efficiency of his treatment are obvious, and obviously wrong. The professor’s goal was simply to secure continual funding for his truly ineffective methods. Sad, but true.
Freedman’s final chapter presents a prescription on how to spot a fraudulent expert forecast. To illustrate a few of his alerts, be especially skeptical “if its to simplistic, universal, or definitive”. The author observes that the advice is likely more trustworthy if “its heavy on qualifying statements” and if “its candid about refutational evidence”.
From Freedman’s research, a hierarchy of experts and specialists can be loosely identified. For investors, industry experts and pundits must be near the bottom of that hierarchy because of perverse financial incentives. Academics and scientists are more properly placed near the top of the pyramid, but they surely also are flawed. So, as usual, buyer beware.
I’ll conclude this post with two brief quotes that I extracted from Freedman’s work. From H.L. Mencken: “There is always a well-known solution to every human problem-neat, plausible, and wrong.” Finally, from Lord Salisbury: “No lesson seems to be so deeply inculcated by the experience of life as that you never should trust experts”. Indeed, seek, but challenge expert wisdom.
You get to assemble, integrate, weigh, and interpret the wide array of expert judgments to suit your specific preferences and goals. Good luck.
Best Regards.
Comments
I've heavily shifted towards companies that I like long-term that also provide a very nice (or especially nice in many cases) yield, whether they be in Asia, Europe, Africa, Brazil, the US or our neighbors to the North. Over time, hopefully the companies will grow the dividend. If you have a self-off like you have the last few weeks, it's not pleasant, but it's an opportunity to continue to add to income on sale (like Brazil's Ambev, which went down huge recently, but is talking about increasing dividend payout.) The yield that I'm getting also has resulted in much less stress and focus on the day-to-day. If things head South, I like what I own long-term and I'll continue to reinvest at lower levels.
This approach is not always going to be popular and it's not for everyone, but quite honestly, it's the best choice that I think I've ever made in terms of investing. I'll continue to reinvest and compound over time. It's been a tough few weeks, but I've been far less upset about it than I would have been in the past and that improvement in psychology has allowed a clearer view towards shopping for bargains rather than just being upset.
Hi Scott,
Thank you for your candid reply. I always benefit from your carefully formulated market insights and preferences. Often your commentaries are valuable investment lessons even if not immediately applicable because of a divergent investment goal.
In no way am I surprised that your investment philosophy and policies are constantly evolving. I’m sure you are a better investor today than yesterday. I’m equally sure that you will be a superior investor tomorrow over today.
I’m glad that you are a more sanguine investor after adopting a longer range perspective. Most simply interpreted, you are now applying a long-term dollar cost averaging strategy using dividends and/or dividend growth to cushion price volatility.
I too have recently recognized my need for an even longer range viewpoint than I normally consider. Until about a year ago, my investment timeframe centered around my wife’s life expectancy plus a little safety factor increment. I finally recognized that our composite portfolio greatly exceeds any even unlikely Black Swan events, so our kids will each be inheriting substantial portions of our portfolios.
I have modified my current portfolio management policy to reflect a now much longer timeframe. In that context my march towards a more heavily weighted fixed income allocation has been halted. I have already realigned our portfolio to its more normal balanced equity/bond mix; I am even contemplating a more aggressive asset allocation given our expanded time scale.
That discovery was like an unfound treasure.
I’m a slow learner, but learn I did. I’m certainly not the investor that I was when I purchased my first stock position in the mid-1950s. Hell, I’m not the same investor I was last year. Change is mostly good, especially when grounded on learning and experience.
Sorry about my delay in responding to your fine submittal, but I was vacationing in San Diego for a few days. Any visit to San Diego is a vacation; it is a marvelous, reinvigorating city.
Thank you once again for your specific input here, but an extended thanks for your ongoing informed postings on MFO.
I wish you continued investment success, especially with your newly-minted, patient, longer horizon approach.
Best Regards.
Buy low, when there is blood in the streets and sell high!Thanks to both Scott and MJB for your input the past 6 months that I have been a member of this forum.We all can become more informed investors through your reflections and investing experience.
http://www.thereformedbroker.com/2013/06/27/why-behavior-is-half-the-battle/