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A Note to Investors: Don’t Blindly Rely On Experts’ Opinions

Many investors tend to believe what experts say due to the perception that experts have the necessary knowledge and experience. The confidence often exuded by experts also make them seem more believeable.

But here’s the thing, experts can be very wrong, very often. In his book Expert Political Judgement, Philip Tetlock drew the conclusion that most expert predictions are random guesses after studying over 25,000 expert predictions.

The recent US Presidential Election is a great example. Many experts were expecting Trump not to win but he did so anyway. This shows that predicting what would happen in the future can be an exercise in futility.

In the world of investing, the track record of strategists is instructive. Here’s my colleague Ser Jing on the subject (emphasis is mine):

“At the end of each year, Wall Street market strategists often forecast where the S&P 500 (a U.S. stock market barometer) will be at the next year’s end.

According to my colleague Morgan Housel, from 2000 to 2014, the “strategists’ forecasts were off by an average of 14.7 percentage points per year.” Someone guessing that the market would climb by 9% per year (close to the U.S. market’s long-run rate of return) over the same period would have produced a forecast that was “off by an average of [only] 14.1 percentage points per year.”

I was recently reminded of the importance of not blindly believing experts’ opinions by Howard Marks. In the investing world, many would be familiar with the likes of Warren Buffett, Peter Lynch, and Charlie Munger. But, not many may have heard about Marks.

Marks is the founder and co-chairman of Oaktree Capital Management. Headquartered in Los Angeles, Oaktree is the largest distressed-debt investor in the world and has amassed a great long-term track record. According to Bloomberg, Oaktree’s funds had generated an average annual return of 19% in the 22 years ended June 2011.

Periodically, Marks releases his thoughts about the investing world in memos he publishes at Oaktree’s website. Buffett has quipped that Marks’ memos are the first thing he opens and reads if he sees them his mail. Buffett has also said that he always learns something from Marks’ memos. If even the Oracle of Omaha can learn a thing or two from Marks, we stand to learn even more.

Marks’ latest memo was about his thoughts on why expert-opinions are not particularly useful when investing, and was released on 10 January 2017.

As investors, we should never base our decisions on the opinions of the so-called experts. Yes, their opinions may sound logical but they are what they are – just opinions. (And we’ve already seen above how poor the track record of experts is.) What we should do, instead, is to exercise independent thinking and differentiate between facts and opinions.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.