Expert Opinions: Signals vs. Noise

Today, when I read the news or browse through social media, I notice a deluge of confident expert opinions and ‘scientistic’ forecasts (too readily) available in our information age.

This is why I am fascinated by the reliability — or lack thereof! — of expert opinions and forecasts. This interest was further developed through my IB Theory of Knowledge presentation, which explored the extent to which it’s possible to make reliable economic predictions. I learned that we frequently derive false security from precise numerical forecasts, which are often based on data that can be conveniently measured rather than the most important parameters (which might be difficult or even impossible to measure).

Hayek’s speech titled ‘The Pretence of Knowledge’ further led me to conclude that economists can make directional predictions, not precise forecasts. Hans Rosling’s Factfulness even describes a quiz in which chimpanzees outperformed so-called experts. I learned that forecasts reported in the media are often made by overconfident pseudo-scholars — and even when made by a genuine scholar, forecasts are still bound by any model's limitations.

Yet thoughtfully developed predictive forecasts remain important for effective decision-making, which (particularly in the investing world) requires an implicit consideration of a necessarily uncertain future. Experts’ analytical, frequently imaginative statements about the future are powerful tools that allow us to build models and glimpse through a translucent lens into a potential future.

During my exploratory journey in the world of value investing, I have learned that investing requires us to distinguish meaningful signals from the cacophony, generated by experts and media pundits and amplified by social media, surrounding the global economy. I am certain that our ability to separate the wheat from the chaff — or, more appropriately, the signals from the noise — is what will determine whether or not we are able to generate alpha over a long period of time. 

As I once said Leave it to the Experts (Don't)!!!

Howard Marks' Latest Memo: You Bet!

I have read pretty much all of Marks' memos, and this one is one of the best yet. The key implication for (equity) investors, if I understand correctly, is that a great businesses can be a poor investment at the wrong price, whilst a terrible business can be a great investment at the right price. Instead of trying to identify winners, we must seek to identify - and capitalise on - 'mispricings'.