The Smartest People In the Market

Marshall Rathmell |

Human nature leads us to find success through knowledge and hard work.  Because of that nature we believe that those that have more knowledge and work harder will be more successful.  While that is true in most parts of our lives, sometimes working harder and trying to outsmart others makes us less successful.  Academic study after academic study has proven this to be the case with investments but it hasn’t stopped people from continuing to try.  The average investor is lead astray by the people and corporations that have financial incentives to keep you believing they have the resources to provide earnings above what is deserved.


A recent report by researchers at Washington University in St. Louis, MO adds to the data showing that you need to be weary of the big brokerage firm, insurance agency, and bank employees that claim with their advanced degrees and astronomical salaries that they can tell you where the economy is going and what you should buy.  The study gathered up the consensus forecasts from three popular economic surveys, including from chief financial officers at large publicly traded firms and the economists at the Conference Board, and compared them with actual market events that occurred after the bold and confident forecasts.


The interesting thing about these various predictions is that historically nobody went back and assessed whether the predictions and forecasts were, with the benefit of hindsight, actually accurate or helpful. 


The result?  The authors found that in every case, the predictions were less accurate in predicting what would happen, short-term and long-term, in the market than what economists call a ‘random walk,’ which can be compared to throwing darts, assuming you have no skill at darts.  The ‘gains’ listed in the researcher’s final table ranged from -0.99% in one year to -18.19% over six months—not the kind of market returns that most of us aspire to.


This confirms a longstanding experiment that the Wall Street Journal conducted some years ago, where expert stock-pickers named the stocks, they expected to outperform over the next three to six months, and the Journal’s reporters threw darts to pick a comparison portfolio.  Most of the time, the dart-throwers outperformed the expert stock-pickers.


So, if market predictions and stock picking don’t perform as well as a ‘random walk’ how does one capture as much as they deserve for providing their capital for world economic growth?  Use the tenants of evidence-based investing like:


  • Tax smart investing
  • Asset allocation
  • Keep trading costs as low as possible
  • Diversification
  • Rebalancing


By finding the right partners (fee-only fiduciaries, low-cost providers of institutional quality factor based ETFs and mutual funds, etc.) you can watch the experts for entertainment or do something else with your valuable time.


Marshall Rathmell


Some of the material above was provided by Bob Veres Inside Information