“Stock Market Strategy for 16th May” and Other Useless Financial Advice

“We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.” ~ Warren Buffett in his 1992 Letter

Over the past few years of studying investors and their behaviour, there is one clear trend I see all around – the amount of money people pay every year to financial advisors, forecasters, stock recommendation providers, and investment gurus claiming to have some insight into the future, has been on a rise.

Apart from costs involved in buying and selling stocks, this is one big expense item that people don’t account for while calculating their investment returns.

Interestingly, people seek financial forecasters in a desperate attempt to avoid confronting the black hole of an unknowable and uncertain future.

They want to believe these “experts” have enough foresight about financial events to make a meaningful difference. Unfortunately they don’t!

I learned this painful lesson about financial market forecasting the hard way – by getting involved in it first-hand only to realize that it doesn’t work.

Anyways, just study the headlines, review brokerage analysis reports, and watch investment websites and media and you will quickly realize most of what passes for financial advice and forecast is really ‘financial fiction’.

Here are several examples:

• Five stocks for 2020.
• May 16 alert! Don’t sell now, odds favour a market rally.
• HDFC’s earnings are forecasted to grow at 30% for the next five years.
• HUL should trade in the range of Rs 400-600 per share.
• Seven mutual funds to buy for 2014.
• Stocks will outperform bonds.

Reading these blatant futurisms from stock market experts reminds me of Norman Augustine who said, “If stock market experts were so expert, they would be buying stock, not selling advice.”

The reason I am writing all this today is because I have received a few emails in recent times with people asking my view on how to trade the stock market for the upcoming election results on May 16th.

Someone asked – “Can you guide me how I can prepare for the 16th May market rally.”

Surprisingly, this person has already assumed that there would be a market rally on 16th May! 🙂

Someone else has been more polite and humble while asking – “Which way will the market turn on 16th May? Will it be like the 2004 crash or a 2009 surge?”

Now, I do not blame these people for asking such questions because this rubbish is what they are getting constantly fed by the business media – television, newspaper, and websites.

Brokerages are writing investment strategy reports for 16th May (Ben Graham would turn in his grave if he reads any of these reports!)

Some research houses are in fact organizing special conferences and webinars for their clients to outline their investment strategy for a “post-election India”!

Now, before you get down to making fun of these people and their sales tactics, understand that you are being fed this junk information overdose because you have asked for it.

Experts advise because you pay for their advice.

Business channels advise because you love the way they deliver the same (advice).

The problem, you see, lies not with them but with you. Your brain simply refuses to work in the face of a readymade advice, most of which is useless and harmful.

It’s the Brain, Stupid!
Dr. Gregory Berns, Professor of Neuroeconomics at Emory University in the US published a study in 2009 that illuminated what happens when we listen to an ‘expert’ we trust.

In an experiment, he asked people to pick between a sure win and a series of gambles. A functional magnetic resonance imaging (MRI) scanner tracked the changes in blood flow in their brains as they made their choices.

In 50% of the instances, an ‘expert economist’ with impressive credentials suggested which option was better; otherwise, people made up their own minds.

When people had to think for themselves, two networks in their brains got activated –

1. One that determines the payoff from a sure win; and
2. One that that calculates the likely gain from a gamble.

These are the areas of our brain that normally make decisions by combining the value of –

• What you have;
• Your fear of loss; and
• Your hope of gain.

However, something interesting happened when people that were part of the experiment listened to the expert’s advice.

The activations in their brains faded! In simple words, the three bulbs that earlier lighted up (bulbs of – what I have, my fear of loss, and my hope of gain), did not light up when people listened to the expert’s advice.

Amazingly, these bulbs stayed quiet even when the expert’s advice was bad!

Dr. Berns’ concluded that when we make financial decisions on our own, our brain’s regions for evaluating risk and reward are active.

But when we take advice from an expert, two things happen –

1. The networks in our brain that earlier alerted us on what we had, our fear of loss, and our hope of gain, do not get activated, and
2. Our choices move toward whatever the expert recommends.

In short, Dr. Berns’ summed it up that…

…the mere act of seeking an expert’s opinion may erase our own. In the presence of a financial advisor, our brain can empty out like a dump truck.

You see, we seek forecasters – fortune tellers, stock market experts – because we want to feel in control and on top of the future.

It feels gratifying to study the analysts predictions, take action, and make things happen – even if it is completely wrong. At least we tried and did our best (at least, that is what we tend to believe).

Humans have an incessant need to control whether it is spouses, nature or their finances. To accept the future as unknowable feels out-of-control and is intolerable.

But then, as Scott Adams of the Dilbert fame writes…

There are many methods for predicting the future. For example, you can read horoscopes, tea leaves, tarot cards, or crystal balls. Collectively, these methods are known as “nutty methods.” Or you can put well-researched facts into sophisticated computer models, more commonly referred to as “a complete waste of time.

Save Your Money, and Skin!
I can say from experience – as an ex-giver of financial advice and also as an ex-taker – that successful stock market forecasts require a crystal ball or direct connection to the Higher Power for them to make any financial relevance.

Most experts blindly extrapolate past numbers to create future assumptions. But nobody can predict the future with statistical accuracy reliable enough to invest on.

This is simply because the future is unknowable. But almost all of the financial advice – like the few examples I mentioned above – is based on the false premise that the future, especially the near term, can be predicted.

What happens when we invest money based on false premises?

Ooh…ah…ouch!

You can save a lot of time, money, and avoid a lot of agony by ignoring all such nonsense that gets passed to you daily in the form of “financial advice” or “recommendations”. Most of all of them are speculative.

Run for cover when you encounter people promising to correctly predict the stock market and subsequently make you rich through their stock tips.

They are incentivized to sell such useless advice. Don’t fall for their pitch!

By the way, can you please tell me how to trade the stock market on May 16th? 😉