Trust No One But Yourself

It has always struck me as strange that so many people seem to be snug in their belief that their money would be more wisely invested by their fund managers than themselves, not to mention they have to pay absurd management fees in most cases. By the same token, people’s alacrity to believe what real estate agents (or their association) say about where the market is going is equally incredible. In both cases, the third party has an obvious self-interest to look after in carrying out transactions on behalf of their principals or in advising them. I’m not saying there are no honest and decent professionals in these fields, but in any kind of investment, it still pays to do one’s own research and make one’s own judgment drawing on all data and information available, rather than relying solely on those professionals’ words. Even forecasts made by economists at large, who are not party to investment transactions but may have their own secret agendas, should always be taken with a grain of salt.

Perhaps on an individual level, it is impossible not to make mistakes sometimes about one’s investment decisions (even Warren Buffet is no exception). The important thing is that we learn from our mistakes, and hopefully those mistakes would make us thirst for more knowledge and information that could better shield us from mishap the next time. And using one’s common sense always helps. For example, when you are presented with a bunch of complicated numbers, it would be prudent to focus not on the numbers but rather on the key assumptions behind those numbers and judge whether they make any sense. If you find them too hard to understand, to err on the side of caution would be the best way to go.

These two articles can illustrate best the perils of trusting the "experts":-

A MacLeans.ca article tells readers about how real estate industry professionals in Canada have been painting a rosier picture than reality would have it about the property market:-

"In conjunction with the forward market (like a futures market, but with contracts sold over the counter), National Bank also launched the Teranet-National Bank House Price Index, which tells us where house prices are at right now. The index uses data from Teranet, a respected but little-known company that manages the land registry database for the government of Ontario. Because every house sale in the province must be entered in the database by law, and Teranet has agreements with other provinces to access their data, Côté says the company’s numbers are much more ‘robust’ than the house price data economists currently use. Because much of that current data comes from the real estate industry itself, the Teranet data can boast of coming from a more unbiased source as well.

When the Teranet market started up in December, it immediately predicted a shocking drop of 20 per cent, followed by an excruciatingly slow recovery that might not see prices return to last year’s high for seven years, or longer. It’s still young and thinly traded, but the Teranet market outlook is startlingly different from what most economists see. Last week, for instance, the Canadian Real Estate Association (CREA) predicted a drop of just eight per cent in 2009, followed by a speedy recovery that would see prices starting to edge up again in 2010. Most banks and investment firms (with the exception of Merrill Lynch Canada, which predicted a more significant drop followed by a slow recovery) fell into line with similar predictions of drops between eight and 12 per cent."

A Marketwatch.com article warns people of economists’ inclination to leave out, inadvertently or otherwise, important ‘tipping points’ in their prediction of future events:-

"So as you read further, please keep in the back of your mind these 13 rare, overlapping ‘tipping points’, unpredictable macroeconomic events that lurk in our peripheral vision as economic time bombs with ‘massive consequences’ according to ‘Black Swan’ math. Always deadly, yet invariably left out, denied, ignored or worse -- totally missed -- by Wall Street's geniuses in their equations .…..

More significant, although invariably left out of Wall Street's equations, true economic tipping points will grow to a ‘moment of critical mass, the threshold, the boiling point,’ according to author Malcolm Gladwell, where ‘change’ (whether positive or negative) is 'unstoppable'. And although left out, these macroeconomic variables can account for over 90% of the risk in an economic equation or derivatives contract, as we've discovered so painfully this past year ……

Worse yet, not only do Wall Street's equations rely on historical data, they fail to account for all the 'Black Swans' luring outside their periphery vision: 'Structural changes, including securitization, globalization and the explosion of debt, have altered financial behavior in ways that the econometric models miss. In the decades since World War II, they have liberated financial risk-taking, as markets learned to game the system beyond the parameters of quantitative models.'"

If you are still not convinced how treacherous it can be to trust the "quants" (or mathematical geniuses in financial markets), perhaps Buffet will be able to change your attitude. “Our advice, beware of geeks bearing formulas,” he wrote in his annual letter to shareholders of Berkshire Hathaway.

Lastly, I would like to pass on a lesson that I learned in the 1980s from a former boss, the late Kwok Tak Seng (founder of the Sun Hung Kai Properties group): "Never put your money in any kind of investment funds because they charge fees!"