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Pragmatic Capitalism

Practical Views on Money, Finance & Life

Let’s Talk About Expert Predictions

Come into my office ladies and gentleman. We need to have a discussion about a growing problem in the investment world – guru worship & putting expert predictions in perspective.

Investing is hard. Really hard. In fact, the overwhelming majority of professionals and amateurs are bad at it. That’s why indexing is growing so fast. So it’s only natural to hang your hat on the expertise of gurus. This makes sense. There’s nothing wrong with relying on experts for opinions.

The problem is, experts often make short-term predictions about things that aren’t that predictable.¹ And the media will intentionally stretch that view further because those are often the views that generate the most attention. As a result, guru worship is like a drug that is totally unregulated and happily consumed.

For instance, the Ira Sohn Conference was today and all sorts of interesting investing tips were being thrown around. One particular idea came from Jeff Gundlach who said that a leveraged bet shorting US stocks was a good idea (with a long position in emerging markets). That sounds crazy bearish, right? Well, I took to Twitter to note that the media has reported a consistent bearishness from Gundlach for many years.

There’s a bunch of potential pitfalls here. First of all, this should not be remotely surprising. Gundlach is talking his book to some degree. He’s a bond manager who doesn’t have much to gain by saying stocks are great and bonds are bad.

Second, I am almost certain that Jeff Gundlach hasn’t actually been this bearish on US stocks all this time. In fact, I am willing to bet that most of his public statements about various assets don’t accurately reflect his portfolio or convictions.  But we don’t actually know for a fact one way or the other because there’s no public assets that reflect these views completely. In fact, the only things we really know about Gundlach’s investing positions are the ones he holds with conviction in his actual funds. In aggregate, the funds managed by Gundlach represent hugely diverse portions of global financial assets. Some have performed very well while others have not, but vague public statements are certain trades will not likely be fully reflected in his publicly available positions. So, while these headlines will garner huge traffic, they don’t actually tell us anything all that useful about how we should allocate our assets.

But most importantly, these predictions are short-term predictions. And we know, for a fact, that experts aren’t very good at predicting the short-term. And while we’re inclined to lean on experts for opinions we need to be careful about letting short-termism bias us into believing that experts are any better about predicting the short-term than anyone else.

So, be careful out there reading headlines and thinking that you’re getting the whole story. Odds are you’re getting only getting half the story and letting short-term biases cloud your judgement.

¹ – I do this here some times. But we should be clear – if you think I can predict the short-term any better than anyone else then you’re letting me fool you. The reason I like macro is largely because big long-term predictions are much higher probability predictions to make.  And almost always much more sensible inside of a sound macro model.  

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering low fee asset management, private advisory, institutional consulting and educational services.Cullen is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Cullen Roche

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