Financial Experts: How Much Should We Trust Them?

One of the things I subscribe to in my Google Reader is the news feed for Seeking Alpha which is basically an aggregator of articles written by so-called financial or investment experts.  There are, on average, over 300 articles published a day. on financial topics, mainly focused on the stock market  I rarely read any articles, but just scan through the titles of the articles.   If one really catches my interest, I’ll read the first couple of paragraphs which is available within the feed.

Just doing so often gives me a pretty good feel of where sentiment lies in terms of the market.

The people that write these articles are often people dedicated to trying to understand the market, and many make understanding and writing about the Dow, NASDAQ, S&P and other markets their full time job.  So you’d probably be inclined to put a lot of trust into them, right?

Not so fast.

Two things have been apparent when reading through the headlines on ‘expert’ sentiment:

  1. Most believe the markets are in for a correction – Probably 80% or more of the headlines tied to overall market sentiment have experts proclaiming that the market rally we’ve seen over the past few months is due to end.  Few predict a minor correction, some predict leveling off, but many seem to think a major correction is in order sometime over the next twelve months. Whatever level they believe, most do seem to think that we’re headed down.
  2. Apple (AAPL) is headed for the stars – Apple has recently exploded, hitting over $500 per share and now has a market cap over $500 billion dollars.  That’s half a trillion dollars and is staggering.  Still, 90% or more of ‘experts’ who write about Apple (and most of them are these days) seem to think it’s still headed up.  I’ve seen predictions of $650 by year end, $800 within 12 months, and even $1,000 per share within the next 24 months.

Granted, I’m no expert, but when I stand back and take a look at these, both of these things happening simultaneously don’t seem possible.  If a major correction (10% or more) were to take place, Apple may not go down, but I would expect the share price to flatten. Plus, if people start losing a good chunk of money, this will likely slow down the economy as well as discretionary spending.  Will people stop buying iPhones and leave lines for iPad 3’s empty?  Of course not, but if even 20% of their customers decide to hold onto their current device for another year longer than they would have because of their portfolios hitting the skids, the 20% quarter-over-quarter sales increases would slow down.

One thing I know is right, and I’m no expert, is that investors don’t like when things slow down.

I guess another way to say it is that I can’t see Apple stock sitting in a vacuum when it comes to their expected growth.  While their stock likely isn’t directly correlated to the market movements, there has to be some correlation.

But, not if you believe the ‘experts’ that call for Armageddon with the market, yet believe that Apple will hit a trillion in market share.

So, where am I going with this?

Before putting all of your faith in experts who make it their career to understand the market, understand that they’re riding the same waves of emotions as everyday investors who don’t know any better.  They don’t take emotion out of their decisions and recommendations.  They may temper their emotions, but they’re still there.

Realize that the  recommendations and guidance are words on paper or a computer screen.  Those words are put there by human beings.  Human beings who can get caught up in a bubble or who can follow in-step with others for fear of being labeled a hack because they’re going against common belief.  Human beings who can and will fail to look at the big picture, even though that’s what they’re supposed to be doing.

Don’t follow blindly.  It’s OK to look at what others are saying, but take a minute to look at what they’re really saying.  You might find that they’re saying two different things at the same time.  That might just open your eyes to realize that these experts….they may have access to more information and know a lot more technical information, but realize that they can’t 100% predict what’s going to happen next any more than a fortuneteller could.

Plan your moves accordingly.  Do your own research.  Make sure what you do passes your own ‘sniff test’ before making a move.  Understand the implications one way or another.

In other words, read what the experts have to say.  But don’t let them make your decisions for you.

How much faith do you put in financial experts?  Do you ever see market experts or even your own financial advisers providing contradicting advice?  Where do you think the market (and Apple) is going?

12 thoughts on “Financial Experts: How Much Should We Trust Them?”

  1. call me crazy.. but i think that I get much better advice from the individual PF bloggers out there, than from the published “experts”..

    the advice the experts are spewing is so generic, while the PF bloggers are are from the real world, and real day-to-day experiences.

  2. I am concerned about a slow down in the economy if gas prices stay high. As a result, I am trending toward a more defensive posture in the market.

    • I agree, gas prices can definitely take the wind out of the sails of a healthy economy. You think the producers would realize that robust sales at slightly cheaper prices is more favorable to their bottom line than spikes followed by inevitable slowdowns.

  3. I think you are conflating two different markets. The NYSE is a measure of U.S. equities generally. The market is likely to correct if most of the pundits think it will – that tends to be a self-fulfilling prediction. Looking at AAPL, you need to look at the global consumer and business market for information technology. The two real markets that AAPL will expand into are Asia, generally, where Apple’s market share is still quite small, and businesses abandoning RIM (Blackberry). There is no reason why these two predictions are inconsistent. Incidentally, I am long on Apple, but have been for a year (during which it dipped considerably but has also risen overall at least 20%). So my money is where my belief is. I’m not a professional marketwatcher, just a semi-regular reader of your blog.

    • Thanks for reading! I agree that they can move in opposite directions, but I think the extreme direction that I’m seeing in terms of both (the markets as a whole could drop like they did in 2008 but Apple will rise another 30% in the next year) don’t seem possible at the same time.

  4. Great article. I trust ‘financial experts’ about as much as I trusted the many economists who said there was no housing bubble! You are right, behind all the expertise are human beings who are subject to their own prejudices, emotions, etc.

    I honestly expect a slow down in the economy and market as well.

    • I don’t think the economy will crash like it did a few years ago but it could be in for a slowdown. Even if the market stays flat for a few months, that’s fine with me. I just don’t want to see the gains we’ve seen over the last six months or so get erased!

  5. Definitely true. Financial experts are human, like you said. Not some superior-minded beings. While it’s good to read advice from those who have more experience and who have done the research, it’s a great idea to double check their reasoning. Thanks for helping us keep our feet on the ground!

  6. I’m no expert, but here’s my take:

    1. It’s hard to predict the short-term direction of the stock market, because anything can send it rising or reeling. Over the long-term, the stocks seemed to be reasonably valued, based on P/E, which is positive. But, the high cost of oil and the shaky sovreign debt are both very negative. I predict modest gains with high volatility for the next couple of years.

    2. I believe Apple’s stock is coming back down to earth. They have enjoyed an incredible run of game-changing new products and the obscene margins that come with little competition. I don’t see how they are going to maintain this momentum with Steve Jobs gone and the competition catching up.

    • Check back in a few months and let’s see how things play out. It’s always interesting to make predictions!

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