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« Sector Rotation and ETF's: The Need for a System | Main | New Market Highs: What's the Downside? »

October 09, 2007

Comments

VennData

The limits of experts theme is an essential because it gets investors away from absolutes. Absoutes make investors vulnerable in a field where the free lunch of divesification protects you from making all or nothing bets.

The list of absolutists is long. We easily spot the ones we disagree with philosophically, politically, or even simply owing to style.

Collecting the data is easier said than done look at the recent Barron's / Cramer tiff over his record. There's no reporting standard for CNBC's or Bloomberg's pundits past results, and as for soon-to-launch FOX business news with 'less jargon' I'd like to know which words they're planning on droppimg! ...and in the land where 99% of newspapers carry horoscopes... rules or regulations on printed or digital media are at least a generation away.

I do believe that even though the Fed has so many experts at their disposal, they ultimtely serve at the discretion of Congress so say what you will about their decisions, politics has some influence on them.

For me, I don't care how low someone claims they'll cut my taxes or cut government spending, when they hold Creationism as equivalent to the Theory of Evolution I am very suspicious of what other of their absolutist beliefs effect their decisions.

Macro Man

Given that Bill was kind enough to link to my site (both here and on his own), I thought I'd share a few thoughts.

Call me cynical, but I generally believe that most people who simultaneously provide commentary and have something to sell are primarily concerned with looking intelligent, so as to sell more (funds, website subscriptions, newsletters, etc.) For many people, there seems to be a fear that being wrong (or admitting that they might be wrong) undermines their perceived "authority", and thus the amound of funds/subscriptions/newsletters that they can shift.

IMHO, the opposite is true, and admitting that one is wrong, not just in a trade but in an underlying premise, is a sign of both confidence and intelligence.

An additional factor is that making outrageous statements/forecasts is away of attracting notoriety....and if you've got funds/subscriptions/newsletters to sell, there is no such thing as bad publicity.

I suspect that each of these factors is behind the behaviour of some of the individuals highlighted in the post. Of course, the same can also be true for Wall Street economists/strategists as well (Messrs. Roach and Rosenberg come to mind, as well as a host of lesser-known lights) who don't necessarily have a specific product to sell.

Overall, however, I overwhelmingly agree with this post...which is why I find myself reading less and less research these days...the facts are tailored to the conclusion, rather than the other way around.

(Disclaimer: I was briefly a colleaguie of Paul McCulley's nearly a decade ago. He was one of the smartest guys I've met. It really makes me wonder, therefore, how PIMCO's Fed calls could have been so god-awful for the last several years, other than a desire to sell more bond funds.

I once wrote a post called Nouriel Roubini is a Big Fat Idiot, so my views with respect to him are probably skewed. I have a very good relationship with Brad Setser at RGE, however.

Poster comments made on my site once prompted Barry Ritholtz to admit bias, so like Carl Spackler, I guess I got that going for me. I may, however, not have an unskewed view of Mr. Ritholtz' value added.)

oldprof

Mike --

If you read the CXO piece, it says that Grantham's funds have performed fairly well and acknowledges that many of his forecasts are of the long-term nature. They suggest that his stock picking may be better than his market timing. I like the fact that CXO describes the limits of the information they have and their methods. They provide enough data for a reader to verify the conclusion (or not).

One of my smartest clients swears by Grantham's work. He does just what you do, reading everything and he is aware of the time frame.

A continuing theme here is that you need to recognize expertise and the limits of expertise. The people in today's examples are all highly-respected experts with an important message. They have not done well at market timing. The guru grading helps consumers like us to use experts more effectively.

Thanks for another thoughtful comment. Maybe I can figure out how to say this better in the book.

Jeff

RB

I like CXO, but in the spirit of confirmation analysis, I find nothing first-rate about their guru analysis. Readers should check for themselves.

Mike C

"In recent days CXO has evaluated the "unimpressive" forecasts of Bill Gross and the "very poor track record" of Jeremy Grantham. For a complete list of evaluations, readers can check out the Guru Grades section of the site."

I follow Jeremy Grantham very closely. I read all of the quarterly letters along with their monthly updates on forecasted returns for various asset classes, as I use GMO's work to aid in my own decision making.

I'm not sure how exactly CXO is evaluating him, so I am highly skeptical of their conclusion vis a vis him. When I have time, I'll have to investigate further. I do know that Mr. Grantham does not make short-term market forecasts but instead projects long-term (5+ year) returns. On that count, I know he is accurate because I have been following them for awhile. There is a fine line between being early and being wrong that isn't possible to draw with 100% accuracy.

I don't remember where I read this, but the statement was successful investing is about getting the big things right, and if you get the little or moderate things wrong (even frequently) it doesn't really matter to your returns.

Whether the market is going to be up 5% or down 5% in the next 3-6 months is a little thing, close to irrelevant. Big things are things like avoiding Internet/tech/large-cap growth in 1999 and buying REITs and small-cap value in 2000. Grantham was pounding the table on both of those themes at the time. Anyone who listened came through 2000-2002 smelling like a rose.

Presently, Grantham is saying to avoid small-caps, and focus on large-cap high quality. Whether that works over the next 3 months really isn't important unless you are a hyperactive trader. What's important is if that is the right call for the next 5-7 years and we won't know that until 2012.

Bill aka NO DooDahs!

I seriously considered doing a comparison of Ritholtz' coverage of the job report to Macro-Man's coverage of the same. It would have been very instructive.
http://macro-man.blogspot.com/

Barry's biggest problem as a fund manager is confirmation bias. In his interview on Bloomers in early August, he described himself as a "miserable bear" who had been long due to his quant models, and who had to field countless calls from clients who said "you sound so negative and yet we're full up with stocks!" Go to this post of his
http://bigpicture.typepad.com/comments/2006/12/reality_check.html
and read the final comment from Barry.

I'll wait.

Back? OK.

So the client accounts that HAD to be long outperformed the index, because they were just picking stocks based on his quant models. Meanwhile, his fund lagged the index and missed the better part of the rally, because it was damaged by his CONFIRMATION BIAS - which in turn was predisposed bearish based on his flawed economic analysis.

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