Guru investors can have the effect of artificially running prices up or down to the indirect benefit of the few. Regarding the broader market, the artificial nature of this effect means that the sustained accuracy of gurus’ advice — the gains initially on offer — decreases as consensus increases.
Listening to gurus often leads individuals to take more risk than they should. So don’t pay too much attention to financial market icons — the likes of Warren Buffett and George Soros. Instead, find a way to look beyond the media spotlight.
As Marcus Padley says, "the closest anyone who relies on a few Warren Buffett quotes is ever likely to come to the Warren Buffett Way is wearing a cardigan and living in the same house for the rest of their life".
"It can be difficult to ignore headlines and soundbites from ubersuccessful investors," says Ben Carlson at A Wealth of Common Sense, "because you want to believe that they’re giving you advice when they speak in public settings.
"My general rule of thumb is to ignore making decisions based on investing soundbites from legendary investors.
"There are a few reasons for this … there’s a good chance they have way more money than you, so the circumstances are completely different. Billionaires are playing a different ball game than you and I. Then there’s the fact that you have no idea what their time horizon, risk tolerance or overall strategy are in regards to their quip about the markets.
"And finally, most really great investors are also really great marketers as well, so there’s no way of telling whether they’re really serious or just trying to earn some publicity or raise more money. Investing based on soundbites is tempting but it’s more trouble than it’s worth." You have to find a way to look beyond the media spotlight — but that’s not to say you shouldn’t listen to what the uberinvestors have to say. These are unusually successful people who have great deal to offer. The problem comes when you try to imitate them rather than find your own edge.
Besides which, even the very best advice isn’t going to be enough to achieve your aims. When James Montier, for example, suggests a simple alternative to forecasting is to buy when an asset is cheap and to sell when an asset becomes expensive, it’s good advice. As he says, "Valuation is the primary determinant of long-term returns."
Robert Shiller’s Cape ratio has been telling us for years that the S&P is expensive. But two months ago he told CNBC it could go up another 50%
Thing is, though, you need to know when an asset is "cheap", when it’s selling below its intrinsic value. How do you determine that? If only "cheap" simply meant a low price per share — as in lower than before or below a certain amount. But it doesn’t. When a stock has a "low price", it’s often for a good reason. As Montier goes on to say, "price per share is only part of the valuation determination, not the measure of value itself."
So, until you can tell what is "cheap" and what isn’t, you may be better off letting someone else do your buying and selling for you.
Things don’t get any easier looking at the overall market either. Robert Shiller’s Cape ratio has been telling us for years that the S&P is expensive. But two months ago he told CNBC it could go up another 50%.
In case you think the answer to this conundrum lies in Buffett’s advice to "hold forever", you need to be sure that, like him, you never have to sell. One of the big issues with "buy and hold" investment advice is the "duration mismatch": the fact that most of us don’t have the time needed to achieve the long-term average returns of the market. When we lose money we can usually regain it; what we can’t get back is the time we have lost from then until now and when we eventually have to sell.
Getting back to Shiller, where the market gurus may be useful, especially the permabears and permabulls, is when it comes to providing alternate scenarios. Other than that, the sort of advice you really want from uberinvestors is advice that can’t really do you any harm.
Such as William Bernstein reminding us that whatever happens, opportunities, though fleeting, will still remain.
"At some point in the next few decades, investors will almost certainly have opportunities," says Bernstein, "given adequate fortitude and cash, to purchase securities at near historically low prices, but it seems likely that these windows will be more fleeting than in the past.
"The reason for this is simple — all of the knowledge and technological advances in the world are never enough to change behaviour. Whatever happens, it would be prudent for investors to plan on lower future returns than the history books show. But if you’re able to behave, avoid panicking when market disruptions occur, diversify globally and keep your costs in check, you should still be able to earn decent returns on your money," Bernstein says.
In short, it’s your job to step away from your emotions and look objectively at the market. Is it dominated by greed or fear?
Your long-term returns will depend greatly not only on how you answer that question but how you manage the inherent risk. As Benjamin Graham said, an investor’s chief problem — perhaps his worst enemy — is likely to be himself. Not only is market timing not an effective method of managing your money, but most great investors have had one core philosophy: to conserve and preserve investment capital. Because, as the saying goes: "If you run out of chips, you’re out of the game."
Campbell Harvey, a Duke University finance professor, looks at Wall Street and sees many ideas that are easy to sell but hard to trust. He is making a career out of challenging research backing the products firms pitch to investors. A lot of it, he says, just isn’t sound.
His studies have shown that more than half of all research pumped out by academics and analysts is, in his words, "likely false". Mine enough data and you can find a result that backs up your idea, he says.
With the asset class coming back into vogue, Harvey has recently published a paper warning of the difficulties associated with investing in commodity futures.
"People still believe they should be buying commodity futures," he says. "But I feel the obligation to correct that misperception," Harvey says.
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