The Chart of Shame

September 07, 2018

Silly financial professionals. Or "professionals."

They just can't seem to understand that they have zero ability to predict the stock market or the global economic future. For just a moment, feast your eyes on what Marketwatch calls The Chart of Shame:

For years, well-known prognosticators in financial media, columnists in major newspapers, economics professors, Nobel prize-winners, business tycoons, and fund managers have been stating publicly that the stock market is going to crash or decline.

The chart above shows you, in 15 seconds, the futility of that. But it's more than futile, because many Americans believed these people, and stayed in or moved to cash or conservative portfolios, a damaging decision in hindsight.

Confidence sells in finance, as it is an uncertain field and people are looking for stability. But the real driver here is called the "Dunning-Kruger Effect" in psychology. The people making these calls suffer from a cognitive bias: they have an illusion of their own skill that surpasses reality, and as such, they do not have the self-awareness to realize their own inaccuracy. Which is why they keep repeating their mistake.

I get asked daily where I think the markets are headed. My response is that I have no idea, and no one else does either. All I know is that anyone who thinks they know may be wrong or right, but it has nothing to do with their reasoning and everything to do with a statistical function, sometimes referred to as "luck."

That is a, shall we say, "differentiated" response in the financial industry, but it's backed by mountains of research.

I have invested through two bubbles (dot-com and real estate) and two crashes (dot-com and real estate). And because I'm not entirely normal, I've studied the language and media around market euphorias and panics going back over a century.

Based on this experience and study, I'll mention one observation. Historically, market tops occur when greed runs rampant, people believe they are not going to lose money, and fear of missing out (FOMO) overtakes reason. I don't see a lot of this today - many people are worried about markets. Whether this is residual from 2008 or not I'm not sure (this was the case after the Great Depression for decades). There is an expression in finance that "markets climb a wall of worry." There is a lot of worry out there among investors.

But that's just an observation, it's not a prediction.

Source: Marketwatch 8-28-2018

Dan Cunningham