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What's Not Going to Change

What's Not Going to Change

| February 06, 2019

Change. We spend much of our time thinking about, predicting and anticipating it. 

Several years ago, the founder and CEO of Amazon, Jeff Bezos, turned the question of change on its head. He said it is more important to consider what will not change. In other words, what are some fundamental truths we can rely upon? 

What Won’t Change 

Human nature. Sure, the players and environment may change, but how we behave as a group seldom changes.  Our preferences as humans tend to be static. Our physiology (hardwiring) hasn’t changed much over the centuries.  

We Are Hardwired to be Bad Investors 

That is a fundamental truth. Think about it. As humans we are emotional, we tend to respond hastily when threatened, we often overreact, we prefer shiny or sexy things to the mundane, we are distracted easily and we hate uncertainty. We face this on a daily basis in the markets. 

Long-term investing is meant to be boring, but our brain desires the exciting. The majority of news is nothing more than noise to the long-term investor. It’s sexy and alluring, yet a costly distraction for most investors. 

We can learn from Mr. Bezos again. He said, “When you have something you know is true, even over the long term, you can afford to put a lot of energy into it.” 

Using Your Energy Wisely 

Most investors use their time and energy speculating on market outcomes and public policy. In other words, we spend our time and energy on things that are unpredictable and always changing. 

We should spend our time and energy on things that don’t change – like human nature. We need to focus on what we can do today to respond better to whatever occurs tomorrow. 

For that reason, I am focusing on how to help all my clients ignore the noise, maintain the proper perspective and improve their financial decisions – despite our natural inclination to allow today’s news and yesterday’s market moves to influence us. 

How Did Wall Street's "Smartest Investors" Fare in 2018?

Every year Barron's gets together a roundtable of "Wall Street's Smartest Investors" to make stock picks for the coming year. I honestly don't know what makes them the "smartest", but one thing I can tell you - it isn't performance.  

2018 Scorecard 

In early 2018, Barron's had nine experts recommend securities they believed would outperform the market. The group made a total of 49 recommendations. The worst portfolio of recommendations by an analyst ended up losing 29%. The best was up 10%. If you had invested in the Smart Investor Index (invested equally across all 49), you would have lost 11.4%. This compares to a total return performance of the S&P 500 of -4.4%. That is some significant underperformance! I am not even sure a dart throwing chimp (or a group of them) could match that underperformance. Actually - that would be a worthy experiment. It could be "World's Smartest Investors" versus "A Random Sampling of Chimps".  

The Aftermath 

So how does a prestigious periodical such as Barron's respond? Yep, you guessed it right. They invited the group back to make recommendations for 2019. Just like they have done in years past. There is no accountability in the business of security recommendations. I believe all security predictions/recommendations should have a prominent disclosure, "For Entertainment Purposes Only". Or at least disclose the record of underperformance of such analyst so a reader can decide how much weight to give their professional opinions.  

It's Still Sexy to Our Mind 

There is ample research and statistics proving that no one can predict which security may or may not do well going forward. But facts are not sexy. It is much more attractive to listen to someone who is deemed an "expert" confidently state what security will do well and why. You see, our brain craves certainty and becomes very unsettled when faced with uncertainty. So when experts confidently provide recommendations, they provide our brain with an illusion of certainty. It is powerful, and can influence us to ignore the facts, and lead with our hope that maybe this time they will be right. This doesn't excuse the experts. It really is a shame that such well-respected, educated and experienced professionals continue to predict something that isn't predictable. Why not just tell the truth? Or at the very least, one of them could choose the S&P 500 or some other broad index as their selection. That would never happen, because then it would diminish the illusion of intelligence, and their ego.  


(c) 2018 The Behavioral Finance Network. Used with permission.