The downfall of financial experts

Another Reformed Broker article The Volatility is the Point

The quickest way to out yourself as an amateur investor is to post comments online mocking others for being in a stock, sector or asset class that’s undergoing turbulence.

Not only does this reveal to others that you’re not actually an investor yourself, it also tells everyone how little class you have. Nelson from ‘The Simpsons’ may have gotten his trademark “Ha ha” in whenever someone slipped and fell, but he still had to trudge back to his mom’s cigarette smoke-filled trailer afterward.

By acting as though there’s something wrong or risible about another investor enduring a drawdown, you demonstrate to everyone watching that you truly don’t understand the nature of investing. You don’t grasp that returns only come to those who are willing to bear that volatility when others won’t.

Volatility is an unavoidable part of investing, but the idea is to maximize returns relative to volatility, which Bitcoin [assuming that is what Josh is talking about] does badly, having considerable volatility and poor returns (especially since 2018 compared to better alternatives). [Bitcoin’s pre-2018 performance, in which it went from just pennies to over ten-thousand-dollars/coin, should be treated as an outlier or one-off event that will never be repeated.]

The financial services and financial media sectors are full of people, like Josh, who have positioned/branded themselves as ‘experts’ (or are held up as such), who either have no idea what they are talking about–and or–whose advice is not commensurate with such an appellation. Their advice and investment strategies, to put it tersely, sucks. That’s why these people tend to be ridiculed or heavily criticized on Reddit, Hacker News and elsewhere online, and deservedly so. It’s not because of volatility.

For example, Josh predicted that Trump’s China tariffs would hurt Christmas spending in 2019. It didn’t. Cathie Wood, Tim Draper, and other ‘experts’ 4 years ago said Bitcoin by now would be at a minimum $250,000–it’s nowhere even close to that. NYTs columnist Charles M. Blow in 2016 called Trump’s win an ‘existential threat’ (until Covid come along, the U.S. economy did very well under Trump, and then quickly recovered from Covid by the time Trump left office, nor was there nuclear war or deterioration of diplomatic relations; in fact, Trump helped de-escalate U.S. and N. Korea tensions). Paul Krugman predicted “… a global recession, with no end in sight” after Trump won–nope. By my estimation, exactly no one from the media, or any expert, predicted that the stock market and U.S. economy would have such a sudden, v-shaped recovery (the S&P 500 making new highs by late 2020, just 5 months into Covid) from Covid. The expectation was that the recession would be as bad as 2008.

Right now the S&P 500 is at 4680, having recovered all its ‘Omicron’ losses. Who saw that coming? No one in the media or on Twitter, but one blogger did, writing “I predict the stock market will make a v-shaped recovery. It’s almost as if this variant was timed just as the fed was looking to raise rates by 2022. Also, the economic toll of this new variant of Covid will prove minimal despite the media hype.”

Everyone gets things wrong, but experts seem to exhibit very little contrition in admitting so, and they assume others will not notice. We do notice.

In addition to bad advice and inaccurate forecasts, some charge large commissions for inconsistent or mediocre returns. We see this with Cathie Wood’s ARK Investments, which has significantly lagged the S&P 500 this year. Or any of the numerous Bitcoin investment trusts, such as Barry Silbert’s Grayscale Bitcoin Fund. Or Peter Schiff, who has been predicting doomsday forever despite the U.S. dollar continuing to make new highs against foreign currencies. Tiger Management in 2000 shutdown after large losses and overall poor performance.

It’s not so much that social media, Reddit, and blogs have ‘democratized’ the internet, but rather it has given consumers alternative viewpoints which in many respects are superior to the claptrap produced by ‘the experts’. There is no need for anyone to entrust their money with an expert, who will charge high fees for poor returns, when they can replicate superior strategies shared freely online without having to pay a commission [such strategies include 3x tech ETFs or FAANG stocks]. It goes against economic convention that free information is superior to paid advice or proprietary methods, but that seems to be the case from what I have observed. I think the social aspect plays a role: having a community means that the quality control is crowdsourced, so bullshit and bad advice gets filtered out quickly.

Experts thrive in carefully curated, controlled environments such as podcasts, the mainstream media (like TV), or Twitter (by blocking anyone who disagrees). In the wild like on Reddit, they cannot stand up to even the slightest scrutiny. Expertise is largely about branding, but this does not work when you cannot control the medium of information.

Reddit’s WallStreetBets, for example, was overwhelmingly bullish about Tesla, Amazon, AMD, Nvidia, and Microsoft, some of the strongest performing stocks since 2015. They got in early on GameStop, in late 2020 before it went up 1,000+% in 2021. This cannot be only attributed to survivorship or hindsight biases, as they have been recommending the same pool of a dozen or so companies and strategies for years, which evidently has worked. It if were just survivorship bias, the pool of recommended stocks would constantly be changing due to the losers being kicked out, but that does not appear to be the case.