Everyone has a form of bias built into their decision-making processes. It could be based on bad outcomes from past experiences or better than expected results from one activity over another. It may be that you gathered your relevant knowledge from a source that itself contained an inate bias.
The trick is to know how to identify bias.
This article from the huge United States based self-directed investor website called The Motley Fool, intelligently covers thoughts and impressions from some members attending a self-help workshop on investing in shares. The article and the many contributor comments peel away the possible elements of self-interest and bias exposed in the seminar.
Newspapers, magazines and websites are currently full of offerings for the self-directed investor. In part this may be a simple reflection of the huge slice of the superannuation industry that operates through small self-managed funds and the rush to cash in on that massive pool of capital. Whether it is superannuation or just the average person’s desire to invest more money, more intelligently, it’s an interesting exercise to ask yourself where the bias may be in these offerings? In a case of unintended irony, many of the self-help publications tell you that you don’t need expensive managed funds or useless financial advisors but you do need their regular updates to help you get ahead – and if you reply now, the usual price is slashed by 30%! You may have more information at your fingertips but does it necessarily lead to better decisions or strategies?
As an advisor, there are a plethora of magazines, websites, email updates, news updates, technical analysis, sector analysis, macro-market commentary and seminars that compete for a place in your research library. Advisors must meet ongoing knowledge and training standards, so there is a need for additional personal effort just to stay abreast of the legislative and product changes – never mind the market, sector, and specific asset history.
Why bother you with such ruminations?
It is to point out the obvious. All of these publications purport to offer you help to make the best decisions. They will help you choose which property to buy, and how to buy it. They will help make sure you hold only the shares that are rising in value or that the shares you do hold have a magical value that the marketplace has not yet recognised. This is not as cynical a comment as it sounds. Rather, it is an observation that the tone of the marketing material is usually very negative of professional advice and very positive of its ability to lead you down the path to riches. However, very few provide information, and fewer again are actually offering advice. What they do offer, is an amalgamation of views and thoughts, interpretations and ideas. Nothing wrong with that – but it is not advice.
Where some workplaces distribute funny or poignant emails, , the planners lodged in Wealth & Security Planners get a kick out of internally distributing newsletters, technical analysis and marketing material that displays irony or a lack of self-knowledge. There is one highly-regarded newsletter that is received regularly by thousands of people and which more often than not includes directly opposite recommendations in the same issue. Page 1 may suggest small companies have had their run while page 3 tells you to load up on small companies. Similarly, there are newsletters that are distributed by what most would consider to be ‘perma-bears’. In other words, the world ended some time ago and it’s likely to get worse, so they will help you work out what to buy of what’s left, at a bargain price. Others again tell you that now is always the best time to buy shares or property or some asset. The most common fun-poking is usually reserved for the marketing or informational pieces that tell you to ‘buy this’ or ‘sell that’ or ‘avoid anything to do with x’, followed by an disclaimer that confirms that the advice is not personal and that nothing can be relied upon – so don’t buy, sell or avoid based on the information provided.
And this is the joke, isn’t it? How can anyone possibly provide useful information unless it is tailored to your specific situation? The answer is that you cannot. At least, the information may be useful from time to time as it suits particular circumstances but the decision on when this is true is entirely in your hands. Hence the continuous disclaimers all over this site, telling you that nothing here is to be considered personal advice and that you should never act on the basis of information contained in this site. That is the real point. Many people are paying a lot of money for data on the idea that it is information or advice. Which it clearly is not, and never can be.
Keep in mind that this is not some rant that everyone needs a financial planner – nor a suggestion that a financial planner be any better at investment recommendations than you or your neighbour or your butcher or the tax driver who drove you to collect that million dollar profit from your last property development. Most financial advisors have been buffetted over the last few years by the locking up of some recommended fund or the de-listing of one company or another – or the failure of an investment account that seemed so strong at the time, so there is an awful lot of humility in the industry about the ability to ‘pick a winner’. The issue is one of being clear about what advice is specifically aimed at you and what is just ‘pie in the sky’ musings on relative value.
If all this sounds like sour grapes then i’m not really making my point very well. Here is an example of the types of outcomes i am referring to…
There was a period a few months ago, when it seemed that Europe would be falling apart as its member countries defaulted on sovereign debt; when deflation was a word of terror on everyone’s lips and fear for the future was so strong that many people were desperate to find a way to simply obtain higher than cash returns for cash levels of risk. Hence the massive interest in fixed interest bond investments. Websites, newsletters and pampleteers waxed lyrical about the detail of investing into bonds. They helped explain what a bond was, how to value them and how to assess their relative risk. What was never really emphasised was the historical aspect of bond pricing, and the relativity of interest rates to those prices. Move forward a few months and your purchases of bonds are most likely not looking too grand. Not saying that they may not still be appropriate but the fact is, you can’t buy everything that a newsletter suggests, and you can’t sell everything that is held as a sell recommendation.
The difference between running a real-world portfolio and simply commenting on the current state of affairs is very, very stark.
This is something that we’ll cover in more detail over time.