Finding The Real Expert

Successful investors are modest. Overconfidence is dangerous.

When I started writing this blog more than ten years ago, I did not think I was an expert on everything. My investment success had more to do with my ability to recognize the expertise of others. I have given examples of what I learned from cab drivers as well as from sophisticated model developers. Nearly everyone has interesting information. You can often learn just by asking, “How’s business?”

This is in sharp contrast to the behavior of most investors. It is just human to be impressed by people who make confident predictions of extreme events. Doing some fact-checking is difficult. Most people spend more time choosing a refrigerator than picking a stock.

But let us turn to a really serious decision — setting your fantasy football lineup!

[I know from my teaching experience that going to a problem in a different context is a great way to put our biases aside. Even if you are not a sports fan or fantasy enthusiast, you will understand the point].

The fantasy sports business is popular and profitable. Players, even those risking only a few dollars, spend many hours researching choices for their weekly lineup. There is a cottage industry of experts — people who crunch numbers, do podcasts, and sell related services. Suppose that we wanted to choose the best source from among the following:

An articulate newbie who had a new system that identified top players from the past weeks or years.

A great-sounding source with football knowledge but no track record.

Someone making less spectacular claims, but with a real-time record of reasonable success.

You can probably guess who gets the business. Let’s turn to investment information.

Eighteen months ago I reported my enthusiasm about a great investment book:

Investors can be better consumers of this information with a little help from two insiders, Josh Brown and Jeff Macke. During my vacation I finished reading their entertaining and informative book — Clash of the Financial Pundits: How the Media Influences Your Investment Decisions for Better or Worse. I plan to do a complete review, but it is especially timely right now.

As you watch or read the news next week, you should realize the pressure on pundits to be bold, dramatic, and confident – even when their forecasts are a bit shaky. The financial incentives range from selling products to building a big reputation. Their analysis of these forces is supported with some compelling evidence from both history and interviews. Reading this book is inoculation against hype, and it is also a lot of fun.