Last night I attended the 2014 CFA Society Ottawa Annual Forecast Dinner. I have a tremendous amount of respect for CFA charterholders and the work that the CFA Institute does to further the integrity of capital markets, and I am a CFA candidate. Much of the material in the CFA program is focused on prediction, yet I believe that predicting the future consistently is impossible. Entering the Forecast Dinner with skepticism gave me an opportunity to have a few quiet laughs, but it also allowed me to observe the extent to which people want to invest with their emotions over logic.
The main event of the evening was a panel of three economists; Patricia M. Mohr from Scotiabank, Derek Burleton from TD, and Pierre Cleroux from BDC were each asked a series of questions and given the opportunity to share their insights. Each of these economists play a major role in creating the recommendations that are used throughout their organizations. The thing that blew my mind was that each of these economists had completely different outlooks on some of the issues that were discussed. They had different opinions because they interpret data differently due to differences in their training and intuition. If any single person’s way of thinking is so great that their forecast will surely be correct, why isn’t everyone already following their advice? People are constantly hopeful that they have found the next oracle that will make them rich. The one person that does seem to have the intuition necessary to consistently beat the market is Warren Buffet, but his intuition also tells him that investors should just buy index funds. The more I thought about the way that these economists’ outlooks differed, the more disturbed I became. The emotional attraction to a super star economist or portfolio manager is so strong that people will push their logic aside for a great story. They want someone that will turn their humble investment into a vast fortune. If a person can speak well and has knowledge of economies and markets, they will be able to convince some people that they can predict the future. In the years that their predictions are wrong they will have great explanations for what threw off their forecast. In years they are right they will be heroes.
As an investor I’m sitting there listening to these three intelligent people debate about where different sectors are going, and I’m wondering how I would pick which one I should listen to. How does a portfolio manager decide which one they will listen to? How does an analyst decide whether or not they agree with their lead economist’s outlook on China’s economy? It’s all a big guessing game and even the smartest people with the greatest amount of resources are playing it. The terrifying part is that investors are so easily sucked into the stories that economists and fund managers tell them about what they should be investing in that they continue to follow their advice. It’s comparable to a big group of people throwing darts at a dart board and assuming that the person that hits the bullseye four times in a row will be able to hit it a fifth time. I would be furious knowing that I am relying on this type of prediction when there exists a scientific approach to investing that eliminates the need for this artistry.
In the scientific approach to investing there is a data backed consensus on the single most effective way to invest, while the art of investing contains thousands of different and conflicting opinions. Maybe I'm biased due to my background in engineering, but when it comes to investing I want science, not art.
Original post at pwlcapital.com