The allure of the superstar investor can be irresistible. You know who they are – the confident, articulate individuals idolised either because of a spectacular non-consensus investment call, the size of their fortune or sometimes because they are simply the most convincing individuals in the room. However, as investors, are we confusing strong investment skills with strong communication skills? Are some people just better at forecasting the future of markets?
Fortunately, there is a lot of research to help answer these questions. A long-lasting US forecasting competition discovered that some individuals are indeed better at forecasting than others, so evidently some people are, indeed, better at forecasting markets than others. However, the evidence also shows that a diverse group is almost always better than a single, ‘superstar’ expert, no matter how good the expert is at his or her work. As investors seeking to separate real insights from the cacophony of investment views available, we believe there are valuable lessons here.
Your favourite ‘expert’
Visualise your favourite ‘expert’ from a field of your choice. What makes them authoritative in your eyes? For some, it is their record of achievements, often characterised by a few specific, high profile achievements. For others, it is their convincing, authoritative style of communication. For others still, it could be their clarity, simplicity or even their entertaining style.
However, do any of these factors automatically mean a similar expert in the investment domain is likely to be the best managers of your money over the long term?
Make no mistake – ‘superstars’ have an important role to play as strong communicators, great story-tellers and effective people motivators. However, we would argue that these characteristics do not necessarily make them a good manager of your money.
Predicting the future is a skill
In a recent book, ‘Superforecasters,’ University of Pennsylvania Professor Philip Tetlock tells the story of the Good Judgment Project. This was an initiative by the US Intelligence Advanced Research Projects Activity that sought to understand whether there were indeed individuals who could forecast future events with a better, and more consistent, track record than others. A true ‘superforecaster’, as his book is titled.
One of the most interesting findings of the study was that there indeed were small groups of individuals who were sustainably better forecasters than the rest. While the book itself delves into a multitude of reasons why this could be the case, the author summarised what he saw as the key characteristics of such ‘superforecasters’:
- A philosophic outlook that is cautious and not deterministic
- A thinking style that is open-minded, curious, reflective and numerate
- A forecasting style that is pragmatic, thinks in terms of probabilities and is “dragonfly-eyed” (ie. one that incorporates inputs from a variety of sources)
- A ‘gritty’ work ethic where individuals are willing to work hard to grow into good forecasters
Who should you listen to?
These conclusions may make you believe that hiring a ‘superforecaster’ may, in fact, lead you to the best investment outcome, even if their desired personality does not make them exciting social company on par with your favourite expert. However, is a single ‘superforecaster’ enough, or will you really need to go further to realise the benefits of a ‘superforecaster’?
Research would suggest more is better, but the group of forecasters must be diverse. In a 1999 paper, Beth Azar notes that ‘collectives’ tend to perform better than individuals when the task at hand involves probabilistic outcomes. Another research paper by PNAS (Proceedings of the National Academy of Sciences of the USA) showed that stock pickers who were part of diverse teams were 58% more likely to price stocks correctly as compared by those in more homogenous groups.
In plain language, what this means is that a group of diverse individuals leads to a better outcome than equally-skilled individuals operating either on their own, or with team members who are very similar to themselves.
The intuitive choice isn’t always the right one
If you’ve had the fortune to visit a bird sanctuary, you’ll know it is easy to be allured by the commanding strength, majesty and presence of an Eagle with its keeper. However, biology teaches us that even such impressive creatures benefit tremendously by migrating in large flocks, rather than on their own – the efficiency gains from flying in formation mean all of them can fly faster, further and for longer.
There are valuable lessons here for investing. While superstar investors or specialists do a great job as experts in their own field and/or as excellent communicators or entertainers, as investors, we are likely to do better by applying the principles of diversity and ‘superforecasting’. For us at Standard Chartered, these principles are key ingredients behind our investment philosophy, because we genuinely believe they should lead to better investment performance over time.
(Manpreet Gill is Head of FICC Investment Strategy at Standard Chartered Private Bank.)