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Experts and Their Expertise Thumbnail

Experts and Their Expertise

I was recently rereading a great book on personal finance. Yes, I am that big of a dork. One area that caught my attention was some data on “experts.” You know how I love all the expert opinions out there. Most of this is just tied to the financial pornography portion of my world, like Jim Cramer on CNBC. With that, let me share some of what I found so interesting. 

First off, this book is from over 15 years ago. All the data is older, but I have a feeling if it were updated it would look substantially the same. Let’s dig into it. 

  • Near the end of each year, we get buried in predictions of where the market will end the next year. BusinessWeek used to do an annual survey of Wall Street’s leading strategists (whatever that means). For the decade referenced in this book, these leading strategists have had their predictions off by an average of 16%. 
  • I am not old enough to remember, but the Dow hit a low of just under 800 points in August of 1982. On Friday the 13th of that month, expert after expert were quoted in the Wall Street Journal and New York Times . They all made predictions of doom and gloom saying why no one should be in the market. Well, a new bull market began that day. Last I looked, the Dow has done okay since then since it is well above 30,000. 
  • This one I do remember as it was the dotcom bubble bursting. Roughly 23 years ago NASDAQ had dropped fell just under 10% in one day. Once again, the experts made their calls. They were consistently along the lines of these are wonderful buying opportunities as the NASDAQ will not drop much at all. Over the next 2.5 years the NASDAQ lost 2/3 of its value. 
  • Experts are not limited to Wall Street. Flashing back to once again before my time to 1980, the US Treasury Secretary felt it was not time to sell any gold even though a record was just set. Well, this is going to sound familiar to what I just mentioned with NASDAQ. Over the next five years, gold lost 2/3 of its value too. 
  • Here is my favorite one. One money manager was brave enough to look at historical predictions of analysts on Wall Street. He looked at 30 years’ worth of data specifically on analysts’ estimate of what companies would earn in the next quarter. His finding was this – they were wrong by an average of 41%. To put that in terms I can wrap my brain around, it would like the local weatherman predicting it would be 60 tomorrow, but in reality it was 35 instead. 
  • A side note to the above comment. It is always amusing when I see headlines about how a company missed estimates. Oftentimes the estimates that were “missed” are what Wall Street predicted and not estimates set by the company. So, maybe instead it was the “experts” of Wall Street who missed the estimates instead of the companies themselves, yet the companies are the ones paying the price if their stock drops as a result. Reminds me of “heads I win and tails you lose.” 
  • One final comment from me that was not in the book. The best performing stock in the S&P500 since 2000 is a company you may not expect. I’ve looked around to see how many analysts follow the company, but I cannot any reliable information. However, I am confident in saying very few followed this company probably until the last few years. The number one performer of the S&P500 since 2000 is Monster Energy. Or as one person I know calls it – a company that targets knucklehead young men. And as a parent of two sons that fall into this category, I believe that description is redundant😉 

My point with all of this is simply a reminder that maybe, just maybe, it is better to set investment strategy based on your individual goals and plan as opposed to what the “experts” are throwing out regularly. Or, to paraphrase a comment in the book – these “experts” would have a hard time hitting the broadside of the barn with a shotgun while standing inside the barn.