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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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The Herd Instinct

Hi Guys,

The herd instinct is alive and well, especially among financial writers.

The fine financial writer Ben Carlson further illustrated this very human tendency with yet another column that reviewed a financial expert survey that was initially reported by M. Faber. Ted has Linked us to many of these other columns. Here is the Link to the Carlson article:

http://awealthofcommonsense.com/2016/06/behavior-of-the-experts/

In conducting this returns forecasting survey, over 400 experts were asked to project future near term hedge fund returns. The predicted range was extreme, Most of these forecasts were outlandishly optimistic. Even the average of these estimates broke the reasonable barrier. They averaged 13% with extremes penetrating 18% annually. Talk about overconfidence!

When forecasting is the subject, study after study establishes that experts are not especially expert. In some instances, experts do manage to be slightly better than the non-expert. Understand that I am not condemning experts in general. When you are sick, a doctor visit is advisable. When your car is sick, a trip to a qualified mechanic is warranted. I just doubt their forecasting talents.

I’m amazed by how many excellent financial writers have hit on the Faber summary column and its general interpretation. I did too. Here is an internal Link to an MFO post that I submitted yesterday on this same topic:

http://www.mutualfundobserver.com/discuss/discussion/28020/hulbert-fumbles-this-time

Faber’s fame grows with this added publicity and referencing. It’s yet another example of the Matthew Effect. From the Bible: “For to all those who have, more will be given and they will have an abundance, but from those who have nothing, even what they have will be taken away”. The “rich get richer , , , ,” saying evolved from that Bible passage.

Experts making forecasts get far too much credit. Their records are typically dismal given that a 50% score is not truly insightful. Many of the plethora of recent financial articles referenced on the MFO discussion board address this issue, and are more or less in common agreement. Experts have a difficult time forecasting accurately. No surprise from this quarter.

I make my own evaluations after some independent research, and react accordingly. Any resultant errors, misjudgments and poor decisions are now easily assigned. I own them.

Best Regards.

Comments

  • I got nothing in response, other than to add that it pays to be cautious AND contrarian. But I mean "contrarian" as my Irish grandmother used it. Only, she would say, "contrary." Because I didn't like to travel with the herd. I like to find good stuff to invest in, companies which never make headlines. I own much more in funds than individual stocks, though, still.
  • MJG
    edited June 2016
    Hi Crash,

    Thanks for your reply.

    The commonly accepted wisdom is that the only way to make extra profits when investing is to be contrarian. Following the herd will not generate excess rewards. That bit of folk wisdom is likely true, but it's extremely challenging to be a full fledged contrarian. Contrarians by definition are swimming against the tide most of the time. And when that tide changes direction, the committed contrarian is simply called lucky.

    I do try very hard to examine both sides of any investment opportunity. Given the complexity of these issues makes the task messy. Many pros and cons exist, and weighing them leaves much room for error. Sometimes this puts me on the contrarian side, but more often, it puts me into the herd class. I suppose I would be a more successful investor if I were more contrarian. That's not easy! It takes both courage and patience.

    I guess I'm more inclined to be cautious over contrarian. Too bad!

    By the way, like your mother, I too mispronouce words. I have a convenient defense; I'm originally from New Jersey and my evolution reflects that handicap.

    Best Wishes.
  • Giggle. New Jersey! I went to school there. Which exit? ;)
  • Hi Crash,

    Exit 11 off the New Jersey turnpike. The last time was 60 years ago. Wow, it can't be that long ago, but it is!!

    Best Wishes.
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