A few years ago an acquaintance was telling me about a stock he bought. It went up quite a bit shortly after he bought it, but then he watched all his gains disappear and was now holding a loser. So he asked me, “How do you know when to sell a stock?” My answer, “you don’t,” was deeply disappointing.
I’m pretty sure that all of my conversations with people outside of finance has ended with the other person wondering if I even know anything at all about investing. I’m sure they’d laugh if I told them some people consider me an expert in the field.
Jason Zweig perfectly encapsulated my interactions with layman when they bring up the market:
A paradox of expertise:
The broader and deeper your knowledge, the more readily you will say “I don’t know,” thereby convincing the typical person that your knowledge is narrow and shallow.
Finance is one of those fields where the term expert is a nebulous concept. Merriam-Webster defines knowledge as “having, involving, or displaying special skill or knowledge derived from training.” The thing is, knowledge derived from training does not mean you have skill, if skill means the ability to beat the market.
Doctors know that if they do a or b, then c or d will happen. Engineers and physicists can make similar claims. But in finance, you can have all of the relevant information about a particular stock, but like dropping an eight sided ball, even if you knew which side it would land on, you couldn’t definitively say which direction it would bounce.
The inability of experts to predict the future is not limited to finance. Clearly Michael Strahan is an expert in football, but he can’t tell you the outcome of a game ahead of time. Nor can political pundits, clearly, predict the outcome of elections.
What does distinguish finance from fields like medicine is that in the markets, experts don’t compete with the average person, they compete with other experts. In most professions, a person off the street can’t step in and fill the expert’s role. For example, the average person has no chance of completing heart surgery more effectively than a trained surgeon, but a person off the street can buy and hold a handful of index funds and do better than most people who devote their entire professional career trying to beat the market. The idea that experts compete with other experts in finance can explain why David Einhorn, who is clearly trained and knowledgable, is down 25% this year.
To be an expert in finance means different things for different people and I suspect this is one of those concepts that can be debated for hours without reaching a conclusion.
We can’t all be experts, but you don’t need to be one in order to obtain satisfactory results in the market. The most important skill an investor must possess is a deep expertise within themselves. You must know your limits. If you can predict how you’ll react to an inherently unpredictable future, you’ll have something that most overconfident experts don’t.