The largest and most comprehensive study on expert opinion was published in 2005 by Philip E. Tetlock – a professor in the Psychology Department and the Wharton School of Management at the University of Pennsylvania. Tetlock recruited over 284 experts from a variety of fields and asked them to predict the probability that certain outcomes – both within and outside their field of expertise – would or would not happen. Over a 20-year span, Tetlock accumulated an extraordinary database of 82,361 expert forecasts – a truly amazing research project.

His findings revealed that, when it comes to predicting future results, experts were seldom more accurate than chance and less accurate than simple computer algorithms. Surprisingly, Tetlock found that the higher the expert’s public profile, the less accurate they tended to be about predicting possible future outcomes. The average person, it turns out, who has an informal knowledge of a given subject, can just as accurately predict the future as an expert in the field. Sobering moment.

So should we completely abandon expert opinion? Perhaps not entirely, but when it comes to predicting future outcomes what may be sensible is to take expert forecasts with a large grain of salt, weigh various opinions and think more for ourselves.

Oracles Are Hard to Find

Of course where experts fall short at predicting the future, Oracles could save the day. Or could they? A popular defense often cited by advocates of the value investment camp, is to point enthusiastically to the success of legendary investors like Warren Buffett, nicknamed the “Oracle of Omaha,” or his teacher before him – the granddaddy of value investing – Mr. Benjamin Graham. While these practitioners are without question some of the greatest investors of our time, to think we are like them would be a costly mistake.

What is often overlooked is that value investing poses two very real challenges for the majority of investors. First, it requires you to deal with mean reversion – the theory that all asset prices eventually return to their mean or average price. A value investor would buy an asset which trades below its average price with the expectation that it would eventually return to its average, higher price. Buy low, sell high as they say. The problem is that asset prices don’t always return to their average price. Think Research in Motion or Blackberry. More importantly, if prices do revert back to their mean, it’s impossible to know exactly when. You could wait months, years or even decades. Think Japan.

Secondly, and perhaps the more insurmountable challenge for investors who believe they can invest like Buffett would be to actually buy or buy more of an asset that has spectacularly fallen well below its average – especially during a significant and protracted market correction. It took great character and nerves of steel to buy more of anything at the depths of the 2008 financial crisis when half of global market values evaporated. To want to buy low and sell high is one thing, to act on it is something else completely.

CRYSTAL BALLS AND ORACLESA Closer Look at the Predicting Powers of Market Experts

“The only function of economic forecasting is to make astrology look respectable.”

– John Kenneth Galbraith, Economist

Through September and October of 2008, as the end of the world neared, or so it seemed at the time, in the middle of a nearly -40% correction in the S&P 500, Warren Buffett, via Berkshire Hathaway, invested $5 billion in Goldman Sachs – one of the hardest hit financial institution in the United States. Then, as an encore, in October he publicly announced that he was a buyer of U.S. stocks for his personal accounts. Buffett, it turned out, was buying low and big in the midst of the worst market correction since the Great Depression. Were you a buyer?

Invest in the Present

If Oracles are indeed hard to find and if the predicting powers of market experts have been scientifically proven to be worse than a coin toss, wouldn’t it make sense then to implement an investment strategy that does not rely on future forecasts but instead makes systematic adjustments to a diversified group of global assets based on the risks and opportunities that are being observed in the present? We think so.

Next time you find yourself discussing your portfolio with your investment advisor, make a point of asking for their outlook on the markets this year. If they answer you with a series of crystal ball predictions, you may want to hurry up and find that Oracle.

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