Monday, December 8, 2008

Attitudes Toward Experts

Listening to financial experts can be both good and bad. Most of what I know about money has come from one financial expert or another. On the other hand, we need to be initially skeptical of anything new some supposed expert says. Evaluate new information before accepting it.

For example, recent research suggests a link between poverty and brain function in children. The researchers believe that poverty is causing brain impairments. My first thought is that maybe some people have brain impairments which prevent them from making much money, and they pass these impairments along to their children genetically. I may be wrong about this, but I won’t accept the researchers’ theory until I see evidence, and I don’t care enough to pay $10 to see the full text of the study.

I extend this way of thinking to all experts. Some people take anything their doctor says as gospel. My thinking is that like any other field, doctors have wildly-varying skill levels, and it pays to be skeptical of their advice. This doesn’t mean that all advice should be rejected. It means that you should seek second opinions, especially when treatments don’t seem to work.

I like to tell people that “50% of all doctors finished in the bottom half of their class.” This way of thinking pushes me to find the best expert and not just any expert. Three areas where I think I’ve done particularly well are my doctor, car mechanic, and athletic therapist. In other areas, I’m still searching.

Clearly some people don’t see the world of experts as I do. A recent experience illustrates this. A friend I’ll call Jim had a nagging sports injury and wanted advice. I directed him to my athletic therapist explaining that I had seen about 15 different athletic therapists and physiotherapists over the years, and this guy was clearly the best.

I saw Jim a couple of weeks later still complaining about his injury. He said he had gone to a physiotherapist (not the guy I recommended), but it seemed to make things worse. In Jim’s mind, he had followed my advice. From my point of view, Jim ignored my advice. Jim seems to think that all therapists are interchangeable.

People who keep going back to experts who fail them seem to be showing the same attitude as Jim did. If your car needs fixing, you have to take it to some mechanic. If all mechanics are the same, then you might as well go back to the same one who messed up your car last time. But, if you believe that mechanics differ in their skills and honesty, then you’ll keep trying new mechanics until you find one you like.

Whether you’re looking for a financial advisor, or some other type of expert, it pays to put in some effort to be knowledgeable yourself and to seek multiple opinions.


  1. I agree with the basic premise that there are 'good' and 'bad.'

    Too many financial experts are worse than worthless when their advice causes harm.

    The traditional advice: diversify, buy gold, buy and hold, wait and the market will recover...have all proved worthless this time.

    Yet those advisors never learn anything new. They don't grow and their clients gets clobbered. yet, they continue to collect their fees. You'd think some of them might have a conscience and refund fees for lousy advice.

  2. Mark: The test of advice is how it performs over a long period of time including both up and down markets. The fact that "stuff money in your mattress" beat "buy and hold" during the recent equity price drop means little.

  3. All I meant to say is that the advice is constant and they don't make allowances for varying market conditions.

    And they don't seem to learn anything new. All strategies are geared to bull markets. Why is there never a recommendation to hedge, for example?

  4. In my limited attempts to look at hedging, you lose more during bull markets by hedging than you gain in bear markets. This isn't necessarily bad, though. For example, buying house insurance is almost always more costly on average than just paying for any problems yourself. But, for most people it's worth it anyway to prevent catastrophic loss. In my case, the potential losses in the stock market aren't catastrophic enough to pay for hedging. But maybe I just haven't encountered the right hedging strategy.

  5. I think a good hedge is to hold cash, though I prefer to go long in cheap stocks and just wait out the declines.

    If someone doesn't want the volatility, by all means hold some cash and government bonds.

    I enjoyed today's post. Some of it relates to deferring to authority. If I know little about medicine and car repair, I'm more likely to be bamboozled, baffled, and bewildered. In addition to a decent doctor and auto mechanic, I also have a good dentist and plumber.

  6. Oh, and I forget to mention that I consider real estate holdings a hedge. Putting small trees on your property is a hedge on a hedge.

    I don't consider home ownership to be a great investment, but it is a decent enough way to store value, and it's better than gold, since you can't live in a house of gold. It's not comfortable, and it's pricey.

  7. Gene: "Hedge on a hedge" -- priceless. I agree that all the things you mention are hedges. I sometimes hear claims that someone has a hedging strategy that doesn't sacrifice return, but I've never seen one that works. It doesn't seem possible to reduce risk without also reducing expected returns. I'm not against hedging, but I'm doing enough of it owning a house and holding some cash and bonds for money needs in the next three years. I'm not interested in more hedging if I have to sacrifice expected returns.