Forget these "expert" opinions if you want to truly boost your finances this year. Here's why…
Every Wednesday, we publish articles related to investing with hopes to help you strategically think about your financial decision-making. Ready to know more about today’s feature? Continue reading below to learn a basic investing tip that will help you go a long way in your investments.
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Forget these "expert" opinions if you want to truly boost your finances this year. Here's why… Are you familiar with the book, “The Wisdom of Crowds” by The New Yorker business columnist James Surowiecki? Published in 2004, the book’s central thesis is that a diverse collection of independently deciding individuals is likely to make certain types of decisions and predictions better than any single member or expert in that group. Surowiecki also presents several case studies and anecdotes to support his claim in the book, and primarily touches on the fields of economy and psychology. “The Wisdom of Crowds” opens with the story of British Scientist Francis Galton, who attended a county fair in the early 1900s. There, he stumbled upon a contest where participants had to guess the weight of an ox. About 800 people tried to guess the actual weight of the animal. Among those were experienced butchers and farmers, and a majority were non-experts who had little or no idea about livestock at all. After the contest, Galton collected all the responses and ran some scientific tests… and guess what? The scientist himself was surprised by what he found out! As stated in the book: “Galton undoubtedly thought that the average guess of the group would be way off the mark. After all, mix a few very smart people with some mediocre people and a lot of dumb people, and it seems likely you’d end up with a dumb answer. But Galton was wrong.” The average guess of the crowd was 1,197 pounds. The actual weight of the ox? *Drum roll* 1,198 pounds! Woah, the crowd’s average guess was sooooooo close!
Because of that, Surowiecki wrote in his book: “Under the right circumstances, groups are remarkably intelligent, and are often smarter than the smartest people in them… Even if most of the people within a group are not especially well-informed or rational, it can still reach a collectively wise decision.” The main point of this anecdote? A diverse crowd gives you stronger insights than any single expert. This is because people from different backgrounds bring unique context to an issue at hand. “The Wisdom of Crowds” in Investing It’s no secret that the financial market has been a major topic of concern for the mainstream media in recent years. In fact, at the start of 2023, the so-called “experts” came out with lots of opinions about where stocks are headed. Examples: Investment bank Goldman Sachs said one should stay invested to ride out the bear market… Financial services firm Oppenheimer Holdings believed the market will be up by 12%… The Bank of America thought the stock market would be flat, if not slightly down… Investment bank Piper Sandler forecasted a 16% drop in stocks… Wall Street analysts believed S&P 500 earnings would be up by 13% this year… Some called for a recession in early 2023 or late 2023 while others thought there wouldn’t be a recession at all… With these “expert” opinions all over the map, it’s no wonder that weak-hearted investors would experience a whiplash! Here’s the thing: If you want to truly boost your finances this year, you should resolve to forget about these “expert” opinions. Instead of looking for just one person who you think has the right answer, you may want to consult the crowds—similar to Surowiecki’s claim in his book. Besides, when you’re trying to measure something as unpredictable as market performance, any individual data point is almost entirely useless, no matter how “expert” it is. Let’s take a look at another example… Whenever Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, teaches his MBA classes on stock picking, one of the things he would do is fill a jar with paper clips and ask the students how many are there. After the first round, he asks the students to guess again. This time, Professor Litman promises a reward if they get the number correctly. During the third round, he includes a punishment if the guess is wrong. Through this simple experiment, Professor Litman and his team discovered that the group’s average guess is fairly consistent each time… and when a reward or punishment is added, the average guess gets even more accurate. What does this imply? People’s predictions tend to be more accurate when they have their skin in the game. That’s one of the reasons why Professor Litman and his team at Altimetry pay attention to investment sentiment indicators—data from people who actually have their money on the line in the market—as opposed to those who are just paid to rave about the market. These data such as active investor sentiment, put-call ratios, correlations, and short interests are all useful when understanding where the crowd is pointed. So, as you resolve to take control of your financial wealth this year, take note of these tips:
Remember: There are “experts” who spend their lives analyzing—or overanalyzing—the markets. However, that doesn’t mean they actually know where stocks are heading. As counterintuitive as it might sound, sometimes it’s better to seek out the average opinion to see the bigger picture. This will help you have high convictions in your ideas… for all the right reasons. Keep these tips in mind as you seek to boost your investment portfolio! Hope you’ve found this week’s insights interesting and helpful. Stay tuned for next Wednesday’s The Independent Investor! Back in the days, adoption cycles were a slow process. Learn more about how you can employ winning strategies in your investments amid changes in various industries in next week’s article! |
