Things investors should hate 2/5: Gurus

31st July 2012

I"m not entirely sure what constitutes the entry qualification to be an investment guru. Intense self-belief and a complete lack of introspection, perhaps?

The best analysts tend to be self-effacing, are often cautious in the face of uncertainty and usually hedge their bets a lot of the time.  Lacking brazen overconfidence they're less popular, but they're the safest hands in the business.

To be honest, investment analysis is a bit of a fool's game.  Short-term trends in markets are terribly hard to get right and going out on a limb and predicting something different from everyone else is a one-way ticket to a new career opportunity.  Unsurprisingly analysts are characterised by herding behavior, as they mainly huddle together providing mutual reassurance.

We are fortunate that there are a few intelligent commentators around who, by some fluke of great fortune, have managed to develop a following based around long-term, sensible investing rather than loud self-publicity campaigns.  Men like James Montier, Warren Buffett, Jeremy Siegel and Charlie Munger can actually hold a consistent approach to markets over a whole career, rather than a coffee break.

But in general being cautious and careful doesn't attract many followers.  Far better to be big, bold and bombastic – and then to rely on the fact that most people don't actually keep track of what you say anyway.  It's also useful if you can rely on some big call you've previously got right: many gurus have built a whole career on the fact that even a stopped clock is right twice a day.

These fake gods are frequently trading on the Texan Sharpshooter Effect, where the eponymous gunman paints on the target after he's finished shooting.  Finding evidence to support any particular point is often quite easy – it's finding and justifying disconfirming evidence that's the challenge.

Unfortunately finding and following people with big reputations is one way in which we ease ourselves of the burden of thinking for ourselves.  Because in some arenas we need to rely on expert judgement – we're generally quite poor at diagnosing our own illnesses, for instance – then we can easily be fooled into thinking investment advisers of all kinds are experts.

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More on Mindful Money:

Things investors should hate 1/5: Models

Mindless With Money: How to be a mindful investor

Islamic Finance – An alternative banking model?

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