Howard Marks: The Problems with Expert Opinions

Howard Marks, co-founder of Oaktree Capital Group, is one of the smartest guys I know. Each quarter, he sends out a letter to investors filled with sharp insights and observations. I find all of his letters to be worthwhile, but this quarter he played right to my confirmation bias in his discussion about experts. Here are the key concepts:

10 Problems with Pundits, Facts and the Future

1. Pundits often fail to understand people and their views: We understand the people who are most similar to us much better than we understand “the other.” The news media tend to be college-educated, coastal, urban dwellers. Is it any surprise they are not in tune with the folks who live in the heartland, may not have gone to college and work on farms or in small towns? The literary arts are by definition an intellectual pursuit, and you will be hard-pressed to recall a pundit who lives in the Midwest and outside of the coastal metro areas.

2. There are no “facts” regarding most future events: This is an ongoing issue with those who try to anticipate what happens next. This is especially true when it comes to markets and the economy. These are complex nonlinear systems, easily disrupted by events. We exhibit a tendency to extrapolate in a straight line into infinity. Not only do we not know what is going to happen in the future, we often are unaware of the full range of possibilities. This is why extrapolation is a poor substitute for actual thinking.

3. Anyone who isn’t confused doesn’t really understand the situation: Forget the future; most people don’t understand the present. The world is complex, nuanced and filled with shades of gray. Most people have difficulty understanding the complexities of causation. Our tendency to oversimplify tricks most of us into believing we understand what is happening most of the time. We don’t.

4. Confusing opinions with facts: We all suffer from the tendency to perceive our beliefs, wishes, hopes and desires as bedrock truth. Wishful thinking affects voters who want to believe their candidate is going to win. That may be disappointing when it comes to politics, but when we substitute what we want to believe over what actually is, it can be terribly expensive for investors.

5. News media provide an opportunity for rampant confirmation bias:  Once upon a time, there were three television channels and a handful of national newspapers. The days before talk radio and the internet created a shared — if flawed — understanding of the world are long gone. Now, media has been balkanized, leaving people to find the “news” that agrees with them and disregard the rest. This is another expensive investor foible.

6. Pundits are never “marked-to-market”: Money managers get to see the results of how they express their investment beliefs each day. Talking heads don’t suffer that fate. Worse, they never seem to be penalized when their interpretations are wrong.

7. People confuse being entertained with being informed: Often what we believe is informative amounts to little more than gossip. There is nothing wrong with that, so long as you recognize your media diet for what it is. This matters for investors, as most of what is news is not only old, it often already is reflected in market prices.

8. Misplaced faith in personal opinions lead to overconfidence: Here is how this danger manifests itself. The sunk cost of media consumption leads us to place a higher value on it than we should. All of that homework, analysis and reading creates the perception of an informational edge that leads to overconfidence.

9. Making financial decisions based on forecasts is dangerous: It is a short hop from overconfidence to bad financial decision-making. Throw in our lack of understanding of what is happening now, and add to it our misplaced faith in our ability to foretell the future, and it’s easy to see how things can go wrong.

10. Understand what you don’t know in the decision-making process: Last, our blind spot as to what we are wholly unaware of is an ever-present threat to investors. Recall the 2010 claims that quantitative easing would lead to hyperinflation — sell stocks! buy gold! — as the classic example of not knowing what we don’t know.

These are my takeaways from Marks’s missive this quarter. You may get something different out of his views, and that’s why I strongly urge you to read it yourself.


Originally: Pundits, Facts and the Future



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