Successful investing isn’t easy. It never will be. Even ignoring the numerous ways that we mismanage risk, the act of picking good investments will always be intrinsically difficult. You are trying to do better than the collective wisdom of all other investors. While markets aren’t efficient, they are generally so close that beating them consistently is extraordinarily hard.

So, it is natural to expect that experts perform better than ordinary people. And certainly, better than simple, systematic strategies. But this doesn’t seem to be the case. While anecdotes aren’t proof, it is always fun to mention a few famous examples at this point. These are all people who were or are regarded as investing experts.

“At a minimum, the dollar will lose another 40 to 50 percent of its value” – Peter Schiff to US News in 2009 giving his one-year prediction.

A stock market crash “worse than the declines of 2008 or 2009 or the worst years of the Great Depression” -Bob Prechter, a celebrity technical analyst, in a New York Times interview in 2010 where he predicted the Dow would fall (from around 9,600 at the time) to below 1,000.

“Whatever money you need for the next five years, please take it out of the stock market”- Jim Cramer on the Today show in October 2008. The market was already down 50% by then and rallied 98% over the next five years.

The point isn’t to make fun of these people. The point is that it isn’t possible to be an expert in the markets just as it is in many other fields.

Now a lot of these people have an incentive to make outlandish predictions. The payoff for being right can be enormous. But the issue is much more prevalent than these (non-randomly selected) quotes might indicate.

It seems that investing is an area where most “experts” are no better than buy-and-hold. This isn’t to deny the skill of outliers like Charlie Munger or Joel Greenblatt, but those two gentlemen are also not going to be managing your 401k. Numerous studies have shown this (see for example “The process-performance paradox in expert judgement” by Camerer and Johnson and its references and citations).

The problem experts have is that investing is a field with a lot of randomness. Most moves in stocks mean nothing. Everyone has trouble with this but because experts have more experience, they are more able to find “reasons” for almost anything that happens. They literally over-think everything. The fields where experts consistently beat models are complicated situations that nonetheless are dominated by structure, for example engineering, medicine, or coaching a sport. Finance is nothing like this.

So, if we can’t rely on experts what can we do?

First, we need to adjust expectations. Accept that the information that does exist is only weakly predictive. Combining lots of small signals can work. Looking for one major signal does not. Similarly, tilt your exposure to the market, rather than make all-or-nothing calls. Your base prediction should be that equities tend to go up. There is nothing wrong with harvesting that risk premium.

None of this will get you interviewed on CNBC, but that isn’t the point either.

Disclaimer

This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting, or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact HTAA or consult with the professional advisor of their choosing.

Except where otherwise indicated, the information contained in this article is based on matters as they exist as of the date of preparation of such material and not as of the date of distribution of any future date. Recipients should not rely on this material in making any future investment decision.