The investment industry does not lack in “financial experts” who claim to have the answers to your particular problem. Oftentimes the biggest challenge for novice investors is to sort through the competing claims of these variant “investment gurus.” In our discussions on the generation of investment “alpha” we have used the phrase, “Generating alpha is neither cheap nor easy.” The same can also be said for the acquisition of investment expertise.
Investing is an interesting topic for measuring expertise simply for the fact that investment returns are easily measured and oftentimes on the public record. CXO Advisory Group has done an admirable job in trying to quantify the investment records of public pundits. They even have a spiffy name for it: Guru Grades. The sad fact is that the pundits they follow are on average right half of the time.
They have now taken this concept one step further. They enumerate the skills required for an “expert witness” in the federal court system and apply this to the realm of investment experts. We recommend you read the piece yourself, but note there are four main they focus on: validity, competence, clarity and bias (or lack thereof). Consumers of investment information should keep these in mind when listening to their favorite investment “gurus.”
Phillip E. Ross at ScientificAmerican.com takes a hard look at what the academic community has learned on the subject of expertise. Although much of the research conducted has been on and with chess players they believe these lessons can be widely applied to other areas of expertise, including (we hope) investing.
For those interested we recommend the entire piece. The bottom line however is that experts are made, not born. Through the purposeful acquisition of “structured knowledge” it has been demonstrated that experts are those who continually seek out challenges. In short, to become an expert requires a great deal of “heavy labor.”
The point is not that every one needs to become an investment “master.” The point is that you need the ability to distinguish between those who claim that status and those who clearly do not. Investing is unique in that you can take a neutral position, i.e. indexing, and still outperform the majority of your fellow investors. However to get comfortable with that approach does require some study and an ability to drown out the cacophony of voices urging to do something altogether different.
On the subject of financial experts Warren Buffett stands alone among the most admired. The folks at Morningstar.com are big fans of the Warren Buffett/Charlie Munger school of investing. Toan Tran spent some time listening to Charlie Munger at the Wesco Financial (WSC) annual meeting and came away with a handful of lessons that will be familiar to those with a passing knowledge of Buffetology. However they are worth reading again.
Our bottom line on the acquisition of investment expertise is simple. Focus on those individuals who are genuinely trying to teach you something. Random, unsubstantiated recommendations for this stock or fund do you little good and may very well do you harm. To mangle a trite lesson, Our preference is to focus on those “investment experts” who are trying to teach us how to fish as opposed to those who simply want to give us a fish.