Don't Trust the 'Experts' This Year

With a new year comes new promises...

About 40% of adults make New Year's resolutions. The most common are health-related goals, like eating better and exercising more.

But in 2023, another common category might be more important than ever.

It's no secret that the market has been a major topic of concern for the mainstream media. Entering the new year, these "experts" are coming out with a lot of opinions about where stocks will go from here.

Here's the thing, though... The expert opinions are all over the map.

Investment bank Goldman Sachs (GS) says you should stay invested to ride out the bear market. Oppenheimer (OPY) is sure the market will be up 12%.

On the other hand, Bank of America (BAC) thinks the stock market will be flat, if not slightly down. And Piper Sandler (PIPR) is forecasting a 16% drop.

Wall Street analysts forecast S&P 500 earnings will be up 13% in 2023. Strategists who work down the hall from those analysts expect earnings to be down 9%.

Some folks are calling for a recession in early 2023... or late 2023. Some don't think we'll get a recession at all.

It's enough to give anyone whiplash.

As I'll explain today, if you want to help your finances this year, you should resolve to forget the experts. Instead of looking for one person with the right answer, you may want to consult the crowd.

It's natural to look to so-called 'experts' for answers...

These are folks who spend their lives analyzing the markets. However, that doesn't always mean they know where stocks are going next. As counterintuitive as it might sound, sometimes it's better to seek out the average opinion.

When we're trying to measure something as unpredictable as market performance, any individual data point is almost entirely useless... no matter how "expert" it is.

New Yorker business columnist James Surowiecki wrote about this in his 2004 book, The Wisdom of Crowds. He explains why it's so important to collect opinions from people with diverse backgrounds.

Surowiecki's book opens with a story about British scientist Francis Galton, who attended a country fair in the early 1900s. While there, he stumbled upon a contest where participants had to guess the weight of an ox.

According to Surowiecki, 800 people entered guesses. While some were experienced butchers and farmers, many were non-experts who had little experience with livestock.

After the contest, Galton collected the responses and ran some scientific tests. He was surprised by what he found...

Galton undoubtedly thought that the average guess of the group would be way off the mark. After all, mix a few very smart people with some mediocre people and a lot of dumb people, and it seems likely you'd end up with a dumb answer. But Galton was wrong.

The crowd's guess, when averaged, came in at 1,197 pounds. The ox had weighed 1,198 pounds. As Surowiecki put it...

Under the right circumstances, groups are remarkably intelligent, and are often smarter than the smartest people in them... Even if most of the people within a group are not especially well-informed or rational, it can still reach a collectively wise decision.

A diverse crowd gives you stronger insights than any one expert. People from different backgrounds bring unique context to the issue at hand.

A lot of financial experts fall victim to the same biases or false assumptions. They tend to focus on the minutiae to get the most eyeballs. And they miss the bigger picture.

They often have high conviction in their ideas... for all the wrong reasons.

We can take this observation a step further by raising the stakes...

Every year, when Altimetry founder Joel Litman teaches MBA classes on stock-picking, he fills a jar with paper clips and asks all the students to guess how many there are.

Then, he asks them to guess again... with a reward if they guess right. And the third time, he includes a punishment if they guess wrong.

We've found that the group average guess is fairly consistent each time. But when a reward or punishment is added, it gets even more accurate. And fewer individuals make wildly wrong guesses.

Said another way, people's predictions tend to be more accurate when they have skin in the game.

There's a reason we pay so much attention to investor sentiment indicators. It's data from people who actually have their money on the line in the market... as opposed to those who are just paid to pontificate about it.

We look at whether investors are getting more or less bearish. We consider data like active investor sentiment, put-call ratios, correlations, and short interest. All of this can be useful for divining where the crowd is pointed.

So as you resolve to take control of your money this year, keep two things in mind...

One, gather as many opinions as you can. The likelihood of one opinion being right is small. But if you have a lot of different perspectives, odds are that the correct outcome is within that range.

A mosaic of data points is more valuable than just one alone.

And two, let your opinion be fluid. Data from the crowd changes with the market environment. Don't be afraid to change your views when the facts change. That is the wisdom of the crowds at work.

I hope you all keep this advice in mind as we embark on a happy and healthy new year.

Best,

Rob Spivey
January 6, 2023