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ETFInvestor (94.83)

I ignore the gurus

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November 04, 2008 – Comments (4) | RELATED TICKERS: IWM , VTV , VV

"It’s no accident that there’s a snapshot of Fannie Mae headquarters alongside the family photographs on the memento shelf in my office.  It warms my heart to think of the place.  The stock has been so great they ought to retire the symbol."
-Peter Lynch, Beating the Street

"I can be just as dumb as anybody else."
-Peter Lynch, September 2008, when asked why he held Fannie Mae stock in his own portfolio to the bitter end.

The point of this essay:  I ignore all predictions about money from ANYONE. 

I don’t care if you’re Warren Buffet, the blithering idiot on TV, some random dude in my Twitter feed, or a famous hedge fund manager. You might be able to predict where a particular stock or the market is going, but I have no way of telling if you are right or wrong so it is just easier to tune you out completely.

I’ll summarize what is explained elsewhere more eloquently in books like Fooled by Randomness:

In any large pool of investors, mere chance will result in some of them greatly outperforming the average.  Unfortunately we have no means to determine whether or not these results actually indicate whether someone is lucky or good, so putting faith (or money) in their ability to continue this winning performance can lead to disaster if they have just been lucky and return to statistically average results.

"We’ve been lucky. Well, maybe it’s not 100% luck—maybe 95% luck."
-Bill Miller, on his streak of beating the S&P 500 for 15 consecutive years.

“Countrywide’s long term business value… we think is in the $40’s compared to its current price of about $14-15.”
-Bill Miller, 2 months before Bank of America bought the company for $5.5/share.

Even if you can predict the future with some degree of reliability, I sure don’t want to take your advice on one of the occasions when you happen to be wrong.

Just as an experiment, spend a day analyzing how many times people make predictions about the future movement of stocks:

“This is going to be worse than 1929″
“They are too big to fail”
“Economists predict that….” (Put anything here.  They get it wrong constantly)
“The Paulson Plan will make money for taxpayers” (You want to bet the future of our country on this???)

The constant noise of the financial media does more than cause you sleepless nights or overconfidence.  Following the herd mentality will inevitably lead you to sell during panics and buy during boom periods - a recipe for lousy returns.

As I write this in November 2008, everyone around me seems to be “moving their money into something safer” until things stabilize.  I constantly hear “pundits” providing this advice on TV.  Countless studies show that this strategy is extremely risky since missing even a few good days in the market can drag your returns below inflation.

I expect that many of you will challenge this logic vigorously.  After all, CAPS itself is setup to recognize the gurus among us.  And I'll be the first to admit that there may be some people on CAPS who truly can make future predictions that I cannot.

My only point is that I can't tell if you're good or lucky.  And so far I haven't seen a good test for reliably determining which. 

4 Comments – Post Your Own

#1) On November 04, 2008 at 4:19 PM, blake303 (36.11) wrote:

There is a really good metric called consistency. 

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#2) On November 04, 2008 at 4:45 PM, kdakota630 (99.96) wrote:

I ignore the gnus.

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#3) On November 04, 2008 at 4:55 PM, johnw106 (31.16) wrote:

I agree with the OP completely. Before I bought anything I read and read and read some more. One thing is abundantly clear.

The so called experts do not know anything any one else does not know or can figure out by simply looking out a window or walking down a street in your town or sticking a phrase in a search box and hit enter.

Case in point. Motley Fool had touted a "New Silk Road". To see their take on this you need to pay 200 US dollars. A five minute search of my own which costs nothing turns up Canadian National Ralways.

Same thing with just about any web site or book that claims to have some insider knowledge or insight. All you need is common sense and then make a educated guess on which way the economy will go. Mutual fund companys are a prime example of this fleecing of investors. Why pay them to do what you can do with ETF's on your own with maybe two hours of research on a weekend? Not to mention the hidden costs. That "active hands on managment" costs you money. The buying and selling of shares comes out of your pocket , not the funds managers. And the fund can nose dive and you still wind up paying for capitol gains. Hows that for getting poked in the keister?

If you are a gambler then by all means try to outguess the market and day trade. or drop a few thousand in that penny stock and hope it goes above two dollars.

 Me? I will stay with my four fund index ETF portfolio and take my 8% average return to the bank and be happy.

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#4) On November 04, 2008 at 6:29 PM, sobodobo75 (87.01) wrote:

You do that at your own peril.  The Peter Lynch example in that article is just a catchy lede.  Everyone has big winners and big losers, the goal is to have more winners when it's all said and done.  

Yep, Peter Lynch probably lost a lot on Fannie, but what the article doesn't mention is that he was also one of the primary investors in Sirtris Pharmaceuticals, which was bought in June by Glaxo Smith Kline for a handsome premium.  So, who knows how Peter's doing this year, maybe not that great, but if your conclusion from the article, etc. other headlines is that noone knows what they're doing, that's not a good one.

You have to be able to differentiate between the Warren Buffets and the blithering idiots on TV, not the same quality of advice.  And even quality advice should be just 1 of many inputs you use in making an investment decision.  But to outright reject what anybody else says, especially the people with a proven track record of success in a difficult craft is just nonsense.

"I can be just as dumb as anybody else" is actually a really great line.  It's a reminder that you're probably not as smart as you think you are.  So checking in with gifted peeps is not a bad idea from time to time.

Also, johnw106, if you're an ETF index fund 4-life type, then why hang out at the Fool?  I'm not trying to be a jerk, I'm just curious.  The Fool is about beating the market, not buying it.  Saying "I don't want to put the work into beating it, I'd rather take an index ETF" is a perfectly reasonable and sensible strategy.  But if that's your strategy, then what's the point of Googling "Motley Fool New Silk Road stock" until you find a shadowy blog that reveals Fool picks?  You're not buying CNI, so why do it?

Stock Advisor beats the market, plain and simple.  And if $100 is not a deal for a year's worth of proven, market-beating advice, then I'm not sure what is.  

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