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.
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”.
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.
Unfortunately, investors aren’t aware of their own behavioral biases. Despite decades of psychological research, Wall Street mostly ignores biases influence on us humans. Even advisors are largely unaware. Sure, they may have sat in a behavioral finance presentation to get some CE credit, and maybe even identified some clients while the speaker was presenting. But the vast majority of advisors are not applying this to their daily business. And therein lies tremendous opportunity – for the advisor to differentiate him/herself, and for the investor to make better financial decisions.
Join The Behavioral Finance Network and begin applying this stuff today!