In Investing as in Politics, It's Wise to Stay Focused on the Evidence

A haloed professional or politician gives a speech and repeats something we have heard many times before. The audience nods their heads in approval and cheers. At the end someone says, “Wow, that was quite persuasive.”

The only problem is: “It just ain’t so.”

Unfortunately, especially during a political year like this one, “just ain’t so” happens a little too often.Mark Twain is widely reported to have said, “It ain’t what you don’t know that gets you into trouble, it is what you know for sure that just ain’t so.”

Why do I mention this and then write the words “widely reported’?

Well, according to research done in the U.S. Library of Congress’ book Respectfully Quoted, Twain saying this “just ain’t so.”As Forbesand othershave reported, the phrase should be attributed to a Josh Billings book called Everybody’s Friendfrom 1874.In saying this, I am not trying point fingers at anyone and I’m certainly not knocking Mr. Twain.Humans are hardwired to anchor on repetition and comments from prominent members of the community, and Nobel prizes have been won for research on what is called the Halo Effectand Availability Bias.Our behavioral tendencies are very helpful when it comes to things like children following the advice of their parents and, as an example, not touching a hot stove when they are told repeatedly it will hurt.##TRENDING##When we’re acting as consumers, however, it’s important to remember that marketing and sales professionals are well-versed in taking advantage of these biases.Of course, most advertising and political copy is not intentionally false. But we can’t be reminded often enough that, when making an important decision, it is often prudent to “trust but verify.”A recent article in the Wall Street Journal might serve as a good example.The story was well-written and quite memorable, focusing on what is reported to be an impressive, long-term investment track record that “wins clients” and “instills confidence”.

What was the problem?

According to the manager’s own website, over the past 1, 3, 5, 10 and 15 years, he has underperformed his declared investment benchmark for every single period, which is not that impressive and doesn’t instill confidence. As an example, after fees, he has lagged his index by approximately 5.5% per year for the past 5-years*.I am leaving out links to the article on purpose and not mentioning the manager because my point is not to call out a specific manager or the journalist writing about him.Instead, my point is that investors and voters alike should simply be aware and consider a little fact checking of pervasive articles, speeches and presentations.Before voting this fall, consider visiting the Pulitzer Prize winning fact checking website Politifact. In particular, watch out for what they list as “Pants On Fire” quotes.As it relates to the next great presentation about a hot investment product, manager or prognostication you hear from Wall Street, consider clicking on the following links to find research or articles related to the following questions:
  • Have Investment Managers Been Able to Consistently Outperform Index Funds ?
  • Have Active Managers Protected in Down Markets ?
  • Have Complex Endowment Portfolios Outperformed Simple Solutions ?
  • Do Hedge Funds Add Value to Taxable Portfolios ?
  • Are Wall Street Forecasts Accurate ?
  • Of course outlier investment managers exist and some professionals on Wall Street have been able to provide predictions that are worth considering.Just don’t be a sheep blindly following what you read or hear into a vote or an investment without remembering what Mr. Billings actually wrote back in 1874:“Wisdom doesn’t consist in knowing more that is new, but in knowing less that is false”According to data posted on the manager’s website, the manager who was profiled in the article has underperformed in his flagship product both gross and net of fees for the past 1, 3, 5, 10 and 15 year periods ending 6/30/16. Fiduciary Wealth Partners, LLC does not guarantee the accuracy of this information and accepts no liability for reliance on this data.