Suppose you were in the position of evaluating professional money managers with whom to invest your own money. Let’s say you met with John, a veteran money manager of some 30 years. If I were you, the first question I’d ask is “show me your track record.” I know that’s the first question my investors ask me. John smiles and pulls out a stack of reports he has written about the stock market and his picks in the stock market dating back to the 1990s. You’re thrilled because you know this will be a data-driven discussion. You sit there for hours reading through all of his predictions about the market and all of his stock picks. But, as you read, you’re baffled because John got it wrong every single time. When he predicted the market would go up, it stayed flat or went down. When John said, “Get out, the market is going down,” it went up. His investors had lost money for more than 20 straight years.
At this point, you were completely confused. Needless to say, you had decided to run out of John’s office and find a different money manager. But, you were also curious how he could be so consistently wrong and yet still be in the money management business. So, you asked him a simple question: “John, why were you so wrong for so long?”
John gives you a look that says, “you just aren’t sophisticated enough to understand the investing business.” Then he explains it to you.
Things changed in the early 2000s. We used to talk about “bear markets” or “bull markets.” Back in 1995, when the Dow was at 4700, I said we were in a bear market, meaning the market would go down for a while. Five years later, with the Dow more than doubled to 11,000, people tried to say I was wrong because I said the market would go down. But, they didn’t understand how things had changed. By 2000, we no longer talked about Bear Markets or Bull Markets; what mattered was “Market Change.” We realized in 2000 that it was really not possible to predict whether markets would go up or down. Markets are too random! Our models just weren’t accurate enough to do that and it was terribly embarrassing when we got it wrong. We realized that the safer bet was to tell folks that markets would definitely change. We didn’t know which direction they’d move, but we predicted they would change. It was also cool because we made it clear that some sectors would go up while others might go down. And, it might even happen at the same time. Technology might go up while mining stocks go down. Once a few money managers started talking about market change instead of trying to predict whether markets would rise or fall, the rest of the money managers fell quickly into line. Oh my, life was so much easier. We still ran our models and they were still wrong at least half the time, but we could always claim we were right because, indeed, markets continue to change. And, I’m telling you now, the entire money management industry works like this. In fact, I just read a study that said that 97% of all money managers agree that the “market change” theory is real.
John leaned back in his chair, sipped his latte and smiled knowingly again. He figured he had landed another client. But, you were not convinced. You thought to yourself, “what the hell, why would I invest money with a guy who’s been consistently wrong for 20+ years and instead of trying to improve his performance, he gives me some bullshit about ‘market change?’” If his models were wrong for more than two decades, they’re probably still wrong. You’re also absolutely infuriated by this bullshit about 97% of money managers agreeing with him. Well, of course they agree with him. They were all wrong most of the time as well. If an entire field uses the same market models and everyone gets it wrong, it’s a lot less embarrassing to just redefine success than to own up to your failures. Indeed, what you really wanted to do was go find the 3% of money managers who disagreed with all these crappy models and who refused to redefine success when they were wrong. You want to invest with the managers who said, “Whoa, wait, Bull Markets and Bear Markets do matter!” But, they had all been hushed by the 97% of money managers who had collectively agreed to change the dialogue over to the “market change” theory. This infuriates you even more. Of course markets change, you think. It’s predicting the ups and downs accurately that enable me to make money.
You leave John’s office in despair. There’s so much at stake. You realize that your entire nest egg is invested with people who have no ability to predict anything and have just changed the rules to make themselves right no matter what happens to the markets. Their models are all wrong and have been for decades. And, yet, only 3% of them are bold enough to own up to it.
You get home and pick up the New York Times and there’s more bad news. The front page headline story quotes the President of the United States saying that the biggest threat to our country is “climate change.” Just as you’re about to pour a tall glass of bourbon to drown all your sorrows, you think back to the 1990s and all the cataclysmic predictions of global warming and how wrong those models were. You wonder how and why “global warming” became “climate change.” The New York Times tells you that 97% of “scientists” believe that “climate change” is real and that it is a terrible threat. Then, suddenly, your mood turns positive. You reflect on your day with John the money manager and how easy it was for you to call bullshit on his redefinition of success from bulls and bears to “market change.” You recall how he tried to bamboozle you into investing with him by pointing out that 97% of his buddies in the money management field agreed with him. You put the bourbon away and realize the planet will be just fine. You understand that the 97% of “scientists” were wrong just like John. And, instead of owning up to decades of failure, they just redefined success and all of their friends, who had been equally wrong, were happy to join the party. You understand precisely why those 97% who were wrong were quick to silence the 3% who were right.
When you left John’s office, there was no chance you would invest your money with him. No chance you were buying his bullshit. As you put down the New York Times, you heaved a sigh of relief about “climate change.” There’s no chance you’re buying that bullshit either.
P.S. The graphic below plots 38 different models by “expert scientists” showing their predictions on global temperatures in the colored lines. The solid black line is the actual recorded temperature. 36 of 38 models were wrong, most of them by a lot. That’s 95% of the models that got it wrong. So, it’s not terribly surprising that 97% of the folks who got it wrong were so willing to change the rules so they could get it right. Hint: don’t invest with them.