Looking Closer at Expert Risk

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2016 is going to be financial chaos, oil crashing, Canadian peso, worst is yet to come, imminent war. The US fed raised the interest rate 0.25% and the world is coming undone. These are what the headlines lead you to believe.

But look back to fall 2008, all news, all everyone was talking about was destruction of capital. But back in late fall to winter 2008 and Q1 2009, it was a epic time to buy. The vast majority of market participants are wrong most of the time. This is why people are able to make a return, they take it from them. Those people don’t listen to television and media experts.

Financial people who want to become recognized as experts need soundbites. To get picked up and quoted by newspapers, television and other media outlets pre-experts need a loud, louder than others, opinion. Becoming an expert this way builds a brand, the expert becoming “that guy”. A great example outside finance expert is Don Cherry. When he speaks its interesting, unpredictable, always has a strong opinion and his brand is packaged with a distinctive style.

Temporary notoriety and distinction is a powerful stimulator. Writers of articles take advantage of this and shop for quotes from “in-industry” people until they get the right quote that pops. Sometimes this compact is known from the source sometimes not. In finance this is called “curve fitting” where you tailor the graph line or numbers to where you need them to fit.

To do this in media, the article must start with a catchy headline loosely based on some current market event. A 1% down market day becomes the headline “TSX down Monday, large retracement imminent say experts” then they find experts who want publicity and are willing to conform their opinion to fit that article.

The perceived downside for the source is that they are wrong, but people forget or don’t bother with looking at the context of the source (background, track record, actual position, etc).

Investors, fund managers, institutions place a lot of stock (literally) in experts. An overreliance on the expert creates a herd mentality and like the office cold, within a week every analyst is spouting the same thing about the current market cycle. Buying into this, creates risk of selling when you should have held or bought more.

Truth is most talking heads are wrong the majority of time. They have to be because of  the need to take hardline, big opinions to get quoted. Consistent experts are paid and promoted into expert status but are really entertainers or they are motivated by promoters of their own services or goods. Some just desire to be quoted as a potential resume soundbite.

“I have no confidence whatsoever that we’ll see a rate hike in September or December.”
-Stan Druckenmiller, Billionaire hedge fund mgr

Fed moved the rate 0.25% in December 2015.
Investors, when making investment decisions must turn down the volume of market noise. Know that TV programs, newspaper articles, are just filler for paid commercials and advertisers. The media outlets are “content generators” and their business model doesn’t make revenue from shows but from selling advertising space in between the show. Example of a great globe and mail scare piece about the certain demise of commercial real estate in July 2009;

http://www.theglobeandmail.com/report-on-business/us-commercial-real-estate-next-big-risk/article4280094/

This article trots out great soundbites to give the article weight:

“The severity of the current downturn is likely to exceed, possibly by a large magnitude, [the crash]of the early 1990s.”
-Deutsche Bank real estate analyst Richard Parkus 2009

“We see [commercial real estate]as a very significant risk.”
-Jon Greenlee, the Fed’s associate director of bank supervision and regulation 2009

In reality the second half of 2009, when the article was written was a fantastic time to invest, the temporarily depressed prices were big incentives to smart buyers that ignored the experts and media.

By contradicting the “experts” and creating a hypothetical 5 year fund (Q2 2009 to Q2 2014) on the same Q2 when the article was written it would have returned a whopping 47.04%. Even better is the timing of the exit just before a top.

NCREIF | Data Products

Fear is a better greater attention getter than opportunity. This is why the majority of news articles run on fear of loss.  https://en.wikipedia.org/wiki/Propaganda_model

Don’t blindly believe experts on the media. The whole idea of buying low and selling high is to buy when everyone else is selling- that’s how you buy low.

Buy on market fear, sell on market greed.