Let me start this week with a quote I showed you recently. It’s especially pertinent given Donald Trump’s surprise election victory last week.
It’s from Thinking, Fast and Slow, a book by psychologist Danny Kahneman.
It details a famous study done by University of Pennsylvania professor Philip Tetlock:
‘Tetlock interviewed 284 people who made their living commenting or offering advice on political or economic trends. He asked them to assess the probabilities that certain events would occur in the not too distant future, both in areas of the world in which they specialised and in regions about which they had less knowledge.
‘In, all, Tetlock gathered around 80,000 predictions.
‘Respondents were asked to rate the probabilities of three alternative outcomes in every case, the persistence of the status quo, more of something such as political freedom or economic growth, or less of that thing.
‘The results were devastating. The experts performed worse than they would have if they simply assigned equal probabilities to each of the three potential outcomes.
‘In other words, people who spent their time, and earn their living studying a particular topic, produce poorer predictions than dart throwing monkeys who would’ve distributed their choices evenly over the options.’
After the events of last week, I’m sure you would agree that dart-throwing monkeys would have had a better chance of predicting the election than most of the political pundits out there.
It just goes to show why you need to take any expert’s ‘opinion’ with a big grain of salt.
When I published this quote a few weeks ago, I got a few responses asking whether I was talking about the experts at Port Phillip Publishing too, and whether I was shooting our business in the foot by bringing this up.
The answers to those questions are ‘yes’ and ‘no’. Look, no one can predict the future accurately all the time, or even much of the time. So you have to take any prediction about the future with a grain of salt, regardless of whether it’s from a trusted source, or an anonymous one.
In the investment world, it means not putting everything on a red or black outcome. It means creating a strategy to deal with any outcome, rather than hoping you’ve picked the right one…or picked a person to follow who has picked the right outcome.
And no, I’m not shooting our business in the foot. Firstly, I don’t think being honest with your readers is ever a business threat, however uncomfortable the honesty might be.
Unless the business is a fragile one, that is. For example, most of the financial industry is fragile. It depends on the ongoing expansion of credit and debt, and the ongoing rise in asset prices.
When times are good, financial firms will tell you that they have an edge because of such and such a way that they do things. They are ‘unique’. But it’s all rubbish. As soon as a bear market hits, they are all in trouble.
Or take real estate. The industry is enjoying a massive tailwind…at least in Sydney and Melbourne. How do you think it would go in a prolonged downturn?
Our business does well in a downturn because we constantly try to provide ideas as to why certain things are happening. Those ideas might not be right, but we are thinking, and being honest, about them.
And if you’ve been reading any of our publications for a while, you’ll know that we have diverse views across the business. There is no ‘company view’.
Our mantra is that we all have different views, and that we encourage you to think for yourself — to be truly independent. Use us as a guide if you want, but the path to personal development and financial independence involves gaining greater control over your thoughts and actions.
We don’t want, or expect, you to blindly follow our recommendations. Or, if you do, know that we could be wrong; always have a plan to manage that situation if it occurs.
The curse of the ‘independent’ investor is that they try to ‘follow’ someone and constantly change who it is they follow. The problem with this is twofold:
It prevents you from taking personal responsibility for your actions. There’s always someone to blame if things don’t work out. And if you can’t accept that the mistake was yours, you’ll never see the problem as yours to fix. As a result, you’ll keep making the same mistake, in a variety of ways, over and over.
Here’s my tip: Read as much as you can. But when it comes to reading opinions, be wary. Make sure that they are well reasoned and have a strong basis in fact. Make sure that you’re not being seduced by your biases. Keep in mind that an opinion is just that — an educated guess that is no better than a dart-throwing monkey.
Opinions may be interesting and entertaining to read, but understand that it is little more than that.
Just think of all the gibberish written in the lead up to the election…and the hindsight bias in full flight now that Trump got the job done. All of it noise…and of no particular use to an investor.
Ironically, I’m hoping this opinion piece is a little more useful than just gibberish. I’m hoping it will encourage you to really think, which will only make you a better, more independent investor.
Tomorrow I’ll get back to writing about the market and money. I hope it will be interesting and entertaining. But it will be little more than just that.
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