Be sceptical about expert advice

Experts will probably give you good advice, but do not overlook the possibility that they may be mistaken.

• For centuries, experts said that the world was flat, but Christopher Columbus proved them wrong.
• Experts (who were paid a lot of money) or some of them at least, failed to foresee and plan for the economic mess that has plaqued much of the world in 2008/2009.

You may not be a financial expert but you are probably an expert at your particular job.  If the advice feels wrong, perhaps it is wrong.

Learn from the Worst: Expert

With all the convoluted factors that drive the stock market, predicting which way it will go in the short term is just about impossible.

But wait. A certain group of people that the media refer to as "experts", how are their predictions? These self-assured sounding commentators that we find on TV, the Internet, or print news tell us that they know just what the latest round of earnings reports or economic figures will mean for stocks. After all, they're experts; don't they have to be at least pretty good at predicting economicand stock markt trends?

Unfortunately, research shows that they don't. Let's see how well the stock picks of most "experts" who appeared in the media actually did. Research on this showed there was no consistency or predictability in the performance of these pundits. The best performers in one week, one month, one quarter, six months, or one year were almost guaranteed to be entirely different in the next period; basically, you couldn't make money by picking a top performing expert as measured over a short period of time and following him or her.

"Experts" are far from infallible. A study found the best forecasters - even the "experts" - couldn't explain more than 20% of the toal variability in outcomes. "Consider what this means. On all sorts of questions you care about - Where will the Dow be in two years? Will the federal deficit balloon as baby-boomers retire? - your judgement is as good as the experts'. Not almost as good. Every bit as good." (This was from a 2006 article for Fortune, Geoffrey Colvin examined this concept by reviewing the book Expert Political Judgment: How Good Is It? How Can We Know?)

Colvin also noted that the study found that the experts' "awfulness" was pretty consistent regardless of their educational background, the duration of their experience, and whether or not they had access to classified materials. In fact, it found "but one consistent differentiator: fame. The more famous the experts, the worse they performed," Colvin said.

So, if that's the case, why do so-called "experts" still get so much publicity and air time? The reason is another result of our human nature. As humans, we want to believe the world " is not just a big game of dice and that things happen for good reasons and wise people can figure it all out." And since people like to hear from confident sounding experts who appear to be able to figure it all out, the media likes to give them air time - and the experts like to get that air time because it pays. This relationship was described as a "symbiotic triangle" - it is tempting to say "they need each other too much to terminate a relationship merely because it is based on an illusion."

The bottom line: Just because someone sits in front of a camera with a microphone and speaks confidently doesn't mean he or she has any sort of clairvoyant powers when it comes to the stock market. In fact, the odds are that four out of every five times, they'll be wrong!

Listen and read very critically

Keep a critical mind when you read or hear market comments. Ask yourself:

• Does the commentator have any track record?
• Are they considering all of the factors?
• If they are pointing to influences which have been present for some time, why should they start moving the market now?
• Are they relying on hindsight?
• Are they hedging their bets?

Be a sceptic. Who is the writer? Don't listen to ill-informed, ad hoc, one-eyed, overpaid, inexperienced, sensationalist, untested, uncommitted and uninvolved people!

It is just too difficult sometimes to have a view. A commentator can gain a lot of respect if he actually said, "I don't know.' He could then continue 'because of the following...' and you know you're going to get a balanced answer. It's brave to say ' I don't know'.

Respect the market, not the experts

The power of the financial markets should be daunting, but many people are not deterred.


Why do people underestimate the difficulty of making money in the financial markets? Here are some main reasons:


1. The experts in the media

2. The widely held belief that many professionals are regularly able to beat the market

3. Some people like to trade the market because they are gamblers - usually with disastrous results.


Experts

The experts in the media promote the idea that markets are easier than they really are. A guy on TV or the newspaper says that the price is going to do this and do that, and it sounds easy. The market can be beaten.

If the media put out a continual broadcast that the market has processed all the information and that the price is right, people would get the message. But they rarely say that.

The experts and media message is that the behaviour of the market can be forecasted. It's a persistent and seductive message, and people think 'ah, I can have a go at that, I can make money out of that'.

You can't blame the average person for following what they read in the newspaper and what they're being told on TV. However, many so-called experts are just commentators or analysts who often don't have any track record and who often, to my ear, don't even make much sense.

Listen critically, rather than just accept what you're hearing or reading. You may be surprised to find that they're not really experts.

The fact that the media and their financial guesswork is entertaining and interesting doesn't necessarily mean that it's the truth.


Most professionals are not outguessing the market

Ever wonder about all the money made by the people working on Wall Street or in the City of London. Surely they know something about markets?

The truth is that very few are successfully backing their views on markets. Most of them wouldn't have a clue what the market was going to do. They make money in other ways, such as commission and mangement fees.

It's not that people working in finance don't know anything - they are usually very good, very smart people. The fact is they're making money out of sales, client relationships and by doing transactions, i.e. facilitating the whole process. They're not actually making money out of successfully predicting what's going to go up and down. They're, therefore, not a reason for you to take up punting cotton futures in your spare time.

Equally, don't be too impressed with your stockbroker just because they sound confident and know a lot of stories and figures. More information does not necessary make the market more predictable. The extra information is probably useless as the price has already adjusted for it - it has been 'priced in'. It's about as useful as playing roulette and knowing whether the roulette wheel was made in Taiwan or Korea.

The critical test is: does the broker make a living out of picking stocks? Probably not. He or she is sitting in their seat because they're getting the fees you pay them to buy and sell on your behalf. It's very easy for someone to have a view when it's with someone else's money.