Beware the experts who think they have a crystal ball

The investing world seems riddled with dozens of ‘experts’, often contradicting each other, but doing so with apparently sophisticated reasoning and great confidence. How do we know whose opinions of the world to believe?

We spend much of our time advising clients to focus on the long term, where the investment debate is less cluttered and, if history is an accurate guide, the returns to a diversified portfolio are a little more assured. For investors able to follow such advice, worries about timing the market, guessing the length of the cycle or even the severity of the next recession all pale into insignificance.

Fortunately, there are a few tell-tale signs which indicate we should not give too much weight to a particular expert in deciding how to invest.

Is the expert’s thesis betting against the house?

The vast majority of the time economies grow, markets on average go up, and over time there is a positive risk premium from being invested. You would have to have a phenomenally clear crystal ball to warrant betting against this rather than staying the course – and if the case is that clear, why hasn’t everyone else seen it already?

This lack of attention to what happens most of the time is something psychologists call base rate neglect – placing too much evidence on your immediate short-term story, and too little on the underlying statistical ‘base rate’ from observed history. This doesn’t mean that experts can’t come to a conclusion that current circumstances are sufficiently compelling to override what happens ‘most of the time’. But we should be very suspicious of any opinion that even fails to mention or address this point.

Is the expert too specific in his predictions?

For example, at the beginning of each year there is typically a slew of commentators telling us with great confidence what will happen ‘in 2015’. Even if the reasoning of what to expect is correct to the exclusion of other viewpoints, to claim with any degree of certainty at all that this will come to pass in 2015 is overly specific. More than that, evidence would suggest that it is likely to be wrong – macroeconomic excesses and imbalances, where they exist, typically only actually get corrected well after the pundits have first called out the imbalance – as is often quoted ‘the market can stay irrational for longer than you can stay solvent.’

Is the forecast irrelevant to your investment needs?

Many investment calls make zero difference to the right decision for your portfolio, so don’t waste your time and energy worrying about anxiety-inducing forecasts that shouldn’t cause you to change anything either way.

Is the forecast based on a single strand of reasoning?

The key problem with many predictions is not that the rationale is fallacious, it is that there are many alternative, and equally reasonable, possibilities that the author has failed to consider. Any forecasting thesis that rests on a single strand of thought or shows little consideration of alternative possibilities should be given lower credibility.

Ultimately, all investment ideas are going to be filtered through the prior beliefs of those advocating them, and so all are going to reflect a biased view of the world in one way or another. The solution is not to ignore investment pundits, but rather to read them critically: the more of the above questions that can be answered ‘yes’ for any investment article, the less value that article has for your investment decisions, and the sooner you should stop reading and move to something that is a better use of your time.

Calum Brewster is Barclays’ head of wealth & investment management for Scotland, Northern Ireland & North England