Be Wary of the Sharpshooter

In my last post, We’re In This Together, I referenced a few ideas from a Morgan Housel post about how the world works.

When Morgan published his post, I re-tweeted it saying he just gave us all inspiration for our next 100 posts.  If you thought I was kidding, I was not.

Today I wanted to highlight a few more of these ideas, and how they all work together to outline something happening in the finance industry.

  • Texas Sharpshooter Fallacy: Goals set retroactively after an activity, like shooting a blank wall and then drawing a bulls-eye around the holes you left or picking a benchmark after you’ve invested.
    • This has, will be, and currently is a problem in the financial media. When markets get tough, as they have been since the emergence of the coronavirus, it presents a great opportunity for advisors to do outstanding work for their clients.  Unfortunately, it also presents a great opportunity for other advisors to try and re-write history and say they “saw all of this coming”.  Really?  You predicted a pandemic would span the globe, shut down the US economy, and send the market down 35% in a month?
    • Forgive me if I’m skeptical. Unfortunately, people that claim to have predicted downturns will always get airtime on TV and will always have a market of people who will listen to them.  People crave certainty.  People crave certainty so much that they’d rather be lied to then to be told an uncertain truth.
    • To all of the individual investors out there, be wary of the sharpshooter who says he or she can predict the next market downturn.
  • False Uniqueness Effect: Assuming your skills are unique when they’re not. Comes from conflating “I’m good at this” with “Others are bad at this.”
    • Piggybacking off the last point, advisors who DO happen to time the market correctly once or twice can get a false sense of skill. That feeling of “I’m good at this” when it comes to timing the market, or even picking stocks, can be very dangerous.  That goes for not just advisors, but individual investors as well.
    • Seeing how much damage was done in 2008-09, and how many people tried and failed to time their arrival/departure to the market made it even more intoxicating for those who actually managed to get lucky. Just because you were able to get it right then, doesn’t mean you’re going to get it right next time and the time after that.
  • Behavioral Inevitability: “History never repeats itself; man always does.” – Voltaire
    • This last point wraps up why the Texas Sharpshooter Fallacy and False Uniqueness Effect even exist. We, as humans, have a hard time learning from our mistakes and not repeating them.

Hopefully these three ideas have helped illustrate why now is such a crucial time for investors.  You’ll be bombarded by people who told you they “called it” when it comes to this pandemic and the subsequent market decline.

My hope is that you’ll start to realize any advisor or financial professional claiming to have a consistent method of predicting market declines is nothing more than a huckster.

Be careful out there.

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