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VIDEOBook Excerpt: Gurus Are Right Until They're Wrong
By
Christopher Witrak
Jan 27, 2012 4:35 pm
In his book, "The Behavior Gap," Carl Richards takes a critical look at the role and influence of finanical celebrities.
The release of earnings reports in recent weeks has financial analysts and gurus pitching their ideas about which stocks investors should buy or sell. Goldman Sachs, for example, encouraged its clients to load up on shares of Apple (AAPL) despite the stock's price spike following a strong report, and many financial news outlets (including this one) continually post stock picks from "celebrity" investors and traders. But how would Carl Richards, author of The Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money, say you should respond to advice from financial celebrities?
"Ignore them."
In his new book, Richards, also a blogger for the New York Times and Morningstar Advisor, explains why most financial "gurus" on TV can't offer you any meaningful advice because they lack knowledge of your personal situation and cannot forecast the future of the markets. Richards teaches his readers how to think on their own about investing -- ignore the herd, make realistic plans for your own financial future and hire an objective financial advisor, he says. And to drive home his point, he includes quick line-drawings breaking down investing concepts and illustrating flaws in the way most people think about money and saving. (See an example below.)
Richards is a certified financial planner and founder of Prasada Capital Management. He works closely with like-minded individuals and families to help them not lose their money and enjoy their lives. Richards himself gained valuable insights about the consequences of listening to the "experts" when he bet too big on a new home -- almost losing his business and putting enormous stress on his family -- during the financial crash of 2008. You can view Richards's website at www.behaviorgap.com, and you can email him at carl@behaviorgap.com or follow him on Twitter @behaviorgap.
The following is an excerpt from his book, which was published earlier this month.
Gurus Are Right Until They’re Wrong
In July 2010, well-known market forecaster Robert Prechter (who champions something called the Elliott Wave Principle) made this prediction: “The Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end.”
Early in 2011, Yale’s Robert Shiller predicted that the Standard & Poor’s 500-stock index would rise from 1,280 (its level on January 10, 2011) to 1,430 over the next decade, a 1.3 percent increase per year.
In January 2011, veteran market watcher Laszlo Birinyi forecast that the S&P would hit 2,854 by (mark the date) the end of the day on September 4, 2013.
So there you have it. Three market gurus with three divergent forecasts, all pretty extreme. All three forecasts showed up in reputable, mainstream news outlets.
What’s an investor to think or do?
Ignore them.
It can be fun to chat with friends or colleagues about your opinion of the stock market. Sometimes it can feel like the duty of any self-respecting American to have an opinion about the market and the economy.
But no one can tell you where the stock market (or any market) is going.
And even if someone did possess that ability, how could you (or I) distinguish that person from the clowns who get lucky once in a while? Would you listen to Prechter, Shiller, Birinyi . . . or someone else?
So Why Do We Listen?
We get interested in predictions because we’re human. A number of factors conspire to make us easy marks for forecasters.
For one thing, our survival instinct means that we’re constantly trying to predict what danger may be lurking in the bushes. And since we’re social animals, we love being in the know. We love being the one to break the news on Facebook or Twitter. On a primal level, we want to be the (highly valued) person who warns others of danger or offers them useful information.
Meanwhile, it’s scary to accept that much of what goes on is random and that the only constant seems to be change. We rely on predicting and forecasting for almost every decision we make, including the weather, our commute time, and even what to wear. It makes us anxious to admit that most predictions (our own and those of others) are flawed, at best. And so we are grateful when people—especially famous, respected people quoted in mainstream publications—offer to tell us what will happen in the future.
Okay. So it may feel kind of scary to give up the idea that you can rely on strangers to tell you what to do with your money or what’s going to happen next in the financial markets. In fact, however, giving up those notions is the first step toward a certain kind of freedom.
Our continued willingness to listen to advice and predictions, despite experience and research that suggest they can’t help us, is an example of why it’s so difficult to behave correctly when it comes to our relationship with investments. We want someone to tell us what to do. But in the end, we have to recognize that the future is unpredictable. Advice and forecasts are often distractions from our real task: getting to know ourselves and our goals, making choices aligned with those goals, and adapting to the surprises that are bound to come along.
We have evolved to scan the horizon for data, and make quick snap judgments. Andrew Lo, a finance professor at MIT, notes that if you were to go into your closet each day and try to come up with the perfect combination of clothes, you would have to choose from thousands of possible combinations.
The same is true for investments. There are millions of ways to design your financial life. So it’s nice to imagine that someone will tell us what to do—or give us information that will make our choices very simple (stocks are going up; buy stocks).
So what do we do when we realize that advice is generic and predictions are unreliable? Isn’t that a big problem? Not really. We don’t have to pick the perfect investments, or the perfect portfolio.
After all, we don’t need or want someone to pick our clothes for us each morning based on predictions about what our day will be like or who we’ll encounter and what they’ll think of our pink shirt. Instead, we rely on our experience and our judgment and our own taste in clothing.
We also rely on our flexibility—if we get it wrong, we’ll adapt. If it’s hotter than we expected, we’ll take off our jacket. If we’re underdressed, we’ll apologize. No big deal. And meanwhile, if we need someone else’s perspective, we can always ask: How do I look?
Likewise, we can design our portfolios to suit our best current understanding of how financial markets tend to work, and what we want to achieve over the coming years. When things change, we can adapt.
And if we need perspective, we can turn to trustworthy people who know us—not some stranger with a show on cable.
--Excerpted from The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money. Published by Portfolio/Penguin. Copyright Carl Richards, 2012.
"Ignore them."
In his new book, Richards, also a blogger for the New York Times and Morningstar Advisor, explains why most financial "gurus" on TV can't offer you any meaningful advice because they lack knowledge of your personal situation and cannot forecast the future of the markets. Richards teaches his readers how to think on their own about investing -- ignore the herd, make realistic plans for your own financial future and hire an objective financial advisor, he says. And to drive home his point, he includes quick line-drawings breaking down investing concepts and illustrating flaws in the way most people think about money and saving. (See an example below.)
Richards is a certified financial planner and founder of Prasada Capital Management. He works closely with like-minded individuals and families to help them not lose their money and enjoy their lives. Richards himself gained valuable insights about the consequences of listening to the "experts" when he bet too big on a new home -- almost losing his business and putting enormous stress on his family -- during the financial crash of 2008. You can view Richards's website at www.behaviorgap.com, and you can email him at carl@behaviorgap.com or follow him on Twitter @behaviorgap.
The following is an excerpt from his book, which was published earlier this month.
Gurus Are Right Until They’re Wrong
In July 2010, well-known market forecaster Robert Prechter (who champions something called the Elliott Wave Principle) made this prediction: “The Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end.”
Early in 2011, Yale’s Robert Shiller predicted that the Standard & Poor’s 500-stock index would rise from 1,280 (its level on January 10, 2011) to 1,430 over the next decade, a 1.3 percent increase per year.
In January 2011, veteran market watcher Laszlo Birinyi forecast that the S&P would hit 2,854 by (mark the date) the end of the day on September 4, 2013.
So there you have it. Three market gurus with three divergent forecasts, all pretty extreme. All three forecasts showed up in reputable, mainstream news outlets.
What’s an investor to think or do?
Ignore them.
It can be fun to chat with friends or colleagues about your opinion of the stock market. Sometimes it can feel like the duty of any self-respecting American to have an opinion about the market and the economy.
But no one can tell you where the stock market (or any market) is going.
And even if someone did possess that ability, how could you (or I) distinguish that person from the clowns who get lucky once in a while? Would you listen to Prechter, Shiller, Birinyi . . . or someone else?
So Why Do We Listen?
We get interested in predictions because we’re human. A number of factors conspire to make us easy marks for forecasters.
For one thing, our survival instinct means that we’re constantly trying to predict what danger may be lurking in the bushes. And since we’re social animals, we love being in the know. We love being the one to break the news on Facebook or Twitter. On a primal level, we want to be the (highly valued) person who warns others of danger or offers them useful information.
Meanwhile, it’s scary to accept that much of what goes on is random and that the only constant seems to be change. We rely on predicting and forecasting for almost every decision we make, including the weather, our commute time, and even what to wear. It makes us anxious to admit that most predictions (our own and those of others) are flawed, at best. And so we are grateful when people—especially famous, respected people quoted in mainstream publications—offer to tell us what will happen in the future.
Okay. So it may feel kind of scary to give up the idea that you can rely on strangers to tell you what to do with your money or what’s going to happen next in the financial markets. In fact, however, giving up those notions is the first step toward a certain kind of freedom.
Our continued willingness to listen to advice and predictions, despite experience and research that suggest they can’t help us, is an example of why it’s so difficult to behave correctly when it comes to our relationship with investments. We want someone to tell us what to do. But in the end, we have to recognize that the future is unpredictable. Advice and forecasts are often distractions from our real task: getting to know ourselves and our goals, making choices aligned with those goals, and adapting to the surprises that are bound to come along.
We have evolved to scan the horizon for data, and make quick snap judgments. Andrew Lo, a finance professor at MIT, notes that if you were to go into your closet each day and try to come up with the perfect combination of clothes, you would have to choose from thousands of possible combinations.
The same is true for investments. There are millions of ways to design your financial life. So it’s nice to imagine that someone will tell us what to do—or give us information that will make our choices very simple (stocks are going up; buy stocks).
So what do we do when we realize that advice is generic and predictions are unreliable? Isn’t that a big problem? Not really. We don’t have to pick the perfect investments, or the perfect portfolio.
After all, we don’t need or want someone to pick our clothes for us each morning based on predictions about what our day will be like or who we’ll encounter and what they’ll think of our pink shirt. Instead, we rely on our experience and our judgment and our own taste in clothing.
We also rely on our flexibility—if we get it wrong, we’ll adapt. If it’s hotter than we expected, we’ll take off our jacket. If we’re underdressed, we’ll apologize. No big deal. And meanwhile, if we need someone else’s perspective, we can always ask: How do I look?
Likewise, we can design our portfolios to suit our best current understanding of how financial markets tend to work, and what we want to achieve over the coming years. When things change, we can adapt.
And if we need perspective, we can turn to trustworthy people who know us—not some stranger with a show on cable.
--Excerpted from The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money. Published by Portfolio/Penguin. Copyright Carl Richards, 2012.
No positions in stocks mentioned.
