How Your So-Called Experts Fail You

How your so-called experts can fail you. Here, the biggest personality you think.

The biggest example of how bitterly experts and analysts fail. To be precise, the most important person in the US in the 1920s forecasted some investments. He was Raskob, the director of a giant chemical company, the chairman of the FINANCE committee at General Motors, who also served as chairman of the National Democratic Party, and the driving force behind the construction of the Empire State Building.

The event was mentioned in The Intelligent Investing. Here’s as it is:

His thesis was that only $15 per month invested in good common stocks - with dividends reinvested - would produce an estate of $80,000 in twenty years against total contributions of only $3,600. If the General Motors tycoon was right, this was indeed a simple road to riches. A rough calculation says - based on assumed investment in the 30 stocks making up the Dow Jones Industrial Average indicates the investor’s holdings at the beginning of 1949 would have been worth about $8,500. This is far cry from the great man’s promise of $80,000, and it shows how little reliance can be placed on such optimistic forecasts and assurances.

Read full: http://efficientfrontier.com/ef/197/raskob.htm

Ther are another two incidents mentioned in The Intelligent Investor from 1998, Long-Term Capital Management L.P., a hedge fund run by a battalion of mathematicians, computer scientists, and two Nobel Prize-winning economists lost more than $2 billion in a matter of weeks on a huge bet that the bond market would return to normal. But the bond market kept right on becoming more and more abnormal-and LTCM had borrowed so much money that its collapse nearly capsized the global financial system.

Adding the funniest incident of Sir Isaac Newton, back in 1720, he owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the threat physicist muttered that he could calculate the motions of the heavenly bodies, but not the madness of the people. Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price and lost £20,000 (today's $3 million). For the rest of his life, he forbade anyone to speak the words "South Sea". Sir Isaac Newton was one of the most intelligent people who ever lived, as most of us would define intelligence. But, in Ben Graham's terms, Newton was far from an intelligent investor - by letting the roar of the crowd override his own judgment, the world's greatest scientist acted like a fool.

Two morals that Benjamin Graham learned in his life:

1. Obvious prospects for physical growth in a business do not translate into obvious profits for investors.
2. The experts do not have dependable ways of selecting and concentrating on the most promising companies in the most promising industries.