Almost everyone likes a good story. That’s especially true about investment clients, and the financial advice industry has taken it upon itself to offer reassurance. Too often, people who give advice to retail clients are so determined to keep those clients calm that they write and say things that they have no way of reliably substantiating.
I have a friend at one firm who wrote a newsletter in early March 2020 assuring readers that the COVID-19 pandemic (a term that was only validated by the World Health Organization less than a week after the newsletter was distributed) would certainly NOT cause a global recession. A few days later, economists, analysts, and commentators the world over acknowledged that a recession was all but inevitable. The fact that it had already started was confirmed shortly thereafter. It ended just as quickly.
On St. Patrick’s Day, another friend at another firm sent out a newsletter that assured his readers that the markets would likely (which I will define as 50% +1 probability), be much higher by the same time next year. I contacted him to challenge his confidence in markets and we bet a pitcher of beer to be purchased by the loser and consumed by both of us on St. Patrick’s Day, 2021. We’ve got about six weeks to go. I might end up losing, but once it is okay to gather in public, I’ll enjoy a nice beverage with a fine fellow either way.
Here’s my observation: my first friend was essentially proven to be demonstrably wrong in a matter of days; my second friend will require more time and the jury remains out. I still think the market will go significantly lower from here, but I might lose out on a timing technicality. Markets have indeed already gone much higher. They may also go lower (or not). The question is: what will happen before St. Patrick’s Day, 2021?
The larger concern, however, is how so many people who give advice see their role. Many see it as being presumptively sage comforters, even as they are quickly exposed as hubristic cheerleaders who engage all too quickly in motivated reasoning. They act as though what they want to be true is, in fact, true. As we all know, saying something is so won’t make it so. Saying we won’t have a recession did not stave a recession off. Of course, it cuts both ways. Saying the market likely won’t be much higher within a year didn’t stop it from going much higher within the year.
One of the lines advisors hear often from management, coaches and consultants is that “people pay you to have an opinion”. Perhaps. My own view is that too many advisors would rather weigh in on something they know almost nothing about and offer their “opinion” in wording that sounds an awful lot like a definitive statement, only to be left with egg on their face. This just in: “I don’t know” is an opinion. It may not sound authoritative, but it is honest and humble and it leaves your face unegged. My opinion remains that markets are frothy – but I certainly don’t claim to know what the short to medium term future has in store.