God help us! It’s guru season again. Every year we drown in predictions from the so-called gurus about how the markets and the economy will perform in the coming year. Their arrival always coincides with the publication of a slew of articles highlighting how poorly the gurus foretold events in the previous year.
Yes, each year there are a handful of gurus that get it right. But we should expect that. Paul the Octopus correctly “predicted” the outcomes of all seven of Germany’s 2010 World Cup matches and the eventual winner – Spain. His overall record was 12 correct predictions out of 14. Pretty good for an octopus. How many “legendary” investment gurus have records that good?
Before you answer that question, let’s agree that making the same prediction year after year and then finally getting it right does not constitute prescience. It may be a measure of perseverance or pugnacity, but it does not show perspicacity.
Granted, guru prognostications are fun to read. They get your juices flowing and your wheels spinning. Perhaps, knowing what this or that guru said makes you a more interesting conversationalist. But their musings are of little value in developing an investment strategy.
It would take a very long time to read all the books, articles, and academic papers that document the utter failure of gurus to accurately predict the future. One of my favorites is an article by Wim Antoons who studied 6,582 forecasts made by 68 market timing gurus. He found that “after transaction costs, no single market timer was able to make money.”
Yet, we can’t get enough of their drivel. Why? Our brains are wired to make predictions. In his book, On Intelligence, Jeff Hawkins wrote: “Prediction is not just one of the things the brain does. It is the primary function of the neo-cortex, and the foundation of intelligence.” In other words, we can’t help ourselves. In addition, we detest uncertainty. Professor Shachar Kariv of UC Berkeley calls it “ambiguity aversion.” It is a personality trait that can be accurately measured. Prognostications may be viewed as pain relievers that soothe our worries about an uncertain future. They might ease our fears or satisfy an inner need, but predictions about the markets or the economy are useless to our clients. They provide no actionable information. In fact, because they often create anxiety and foster the urge to make bad choices, they are dangerous.
Try something useful instead
With the time you save by ignoring gurus, teach your clients how to be successful investors. It will be a far more useful endeavor and will pay off handsomely for your clients.
Don’t teach them how to invest successfully on their own. Teach them how to behave properly while you invest on their behalf, so they can reap the benefits.
There are many ways to build good portfolios. Yes, some will turn out be better than others. But we don’t know, today, which will be the winners at any given point in time in the future.
Knowing which one will be best 20 years from now is not important. Many portfolios will be good enough to get your clients to their long-term financial goals. Fortunately, the tools and methodologies necessary to build them are widely known.
Building a good portfolio is not the problem. Getting your clients to stick with the portfolio you have built for them so it can do its work is the problem.
The academic literature documents a very low level of financial literacy throughout the world. This country is no exception. Behavioral researchers have also documented many behavioral quirks and tendencies that work against humans when they invest their money. We’re wired to fail.
The key is education. Again, you don’t need to teach your clients how to invest. You need to teach them how to behave and why to behave that way.
The first lesson – how to behave – is simple. “Tell me about your current situation, including your goals, dreams, and aspirations. Together we’ll make a plan to achieve them. I’ll build a portfolio consistent with the plan. We’ll meet periodically to review progress. Tell me if your situation changes and we can make adjustments. Whatever happens, don’t abandon the plan.”
Getting clients to do this – especially the “stick with the plan” part – can be hard. The client’s own wiring and the deafening noise from the gurus work against them.
It helps if they understand why. Giving them a basic framework for understanding how markets work provides them with the foundation they need to grit through the difficult times.
Unfortunately, so much of the material published by the investment industry is misleading and lacks objectivity. Everyone is selling something.
In response, my firm created a source of basic information that advisors can use to help educate their clients. We made it available to anyone, not just the advisors who work with our firm.
The material is written for clients. It is intended to be clear and simple, although, admittedly, explaining markets and investment concepts is not always easy. The material does not mention or attempt to sell any of the products or services of our firm.
You can find the full library of materials on our website under the knowledge center tab in the Navigator Investor Education Resource Center. Visit and look around. We do not ask for or capture any of your personal information and will not contact you unless you ask us to.
Start your browsing with either 10 Facts Clients Need to Know to Achieve Investment Success or You Have Control Over Your Own Investment Success. Both pieces are designed to encourage clients to stick with their portfolios during difficult times and to explain why that makes sense.
There is not a single book, article, or academic paper that documents the success of market forecasting gurus. But there is a little corner of the Internet dedicated to helping investors make sense of financial markets, products, and concepts. Enjoy your stroll through our library.