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Ignore the Gurus: Part II

Scott's Column

The annual tsunami of prognostications about how the stock market and the economy will perform in 2018 was beginning to slow to a trickle, thankfully. Then the stock market had a major hiccup and the punditry scrambled back to its soap boxes to give us another dose.

Their explanations about why the market took a sudden dip are no more valuable than their prophecies about how the markets or the economy will perform in a given year. I have stopped counting the number of explanations offered up for this particular blip. Rising interest rates, fears about inflation, program trading, Treasury Secretary Mnuchin’s statements about wanting a weaker dollar, and the recent tax cuts have all been blamed. Take your pick.

Each explanation for why the market dithered was accompanied by a gaggle of equally unreliable thoughts about where it would go from here. And each was accompanied by enough weasel-words, hedge clauses, and escapes hatches to avoid any accountability in the future.
Let’s face it, as a group, market gurus have a miserable track record. Heck, experts in general are pretty lame when it comes to telling us what lies ahead.
In 2006, Professor Philip Tetlock published his 20-year study of the efficacy of experts at predicting the future. He reached the conclusion that they were no more effective than dart-throwing chimpanzees. No offense to the chimpanzees, but Tetlock’s study is a pretty definitive indictment of the punditry. His was not the only one and it was not the first.

In 1980, Professor J. Scott Armstrong developed what he called the “seer-sucker theory” of experts. After reviewing many studies documenting the poor performance of experts in predicting the future he articulated his theory: “No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers.” Why do we act like suckers?
In 2012, Nate Silver gave us some insight into the problem in his book, The Signal and the Noise: Why So Many Predictions Fail-but Some Don’t. As humans we have a deep dread of uncertainty. Our brains naturally attempt to bring order to the chaos that we experience in everyday life.

Gurus fill a need by making complex adaptive systems like the stock market seem explainable.  And, if they are explainable, maybe they are even predictable, or better yet, controllable.

This is where advisors run a huge risk. Although it may seem like a good idea to offer up the explanations and predictions of the gurus to our clients, there is a danger in doing so. If events can be so easily explained and the future so easily predicted, why did you, the advisor, not see this downdraft coming and take action to avoid it? And if your clients accept the explanations and predictions of your favorite guru and they are wrong, what happens to your credibility?
We are far better off teaching our clients what we know to be true. Markets are sometimes volatile and in the short term unpredictable. It’s possible that markets will experience further declines; but it’s possible they won’t. The declines so far have been well within historic norms. Things could get worse, but if they do, they will recover. In the long term the markets are very predictable—they go up. Trying to time the markets is a recipe for failure.
No one likes market declines, especially when they are sudden and dramatic.  But you have a choice. You can either teach your clients the truth about the nature of markets and how to behave as a successful long-term investor, or you can try to pacify them with the simplistic explanations and hollow predictions of the gurus. The choice is yours.