ISMS 25: Larry Swedroe – Admit Your Mistakes and Don’t Listen to Fake Experts
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Quick take
In this episode of Investment Strategy Made Simple (ISMS), Andrew and Larry discuss two chapters of Larry’s book Investment Mistakes Even Smart Investors Make and How to Avoid Them. In this sixth episode, they talk about mistake number 9: Do you avoid admitting your investment mistakes? And mistake number 10: Do you pay attention to the experts?
LEARNING: You’ll only learn from mistakes if you admit that you made them. Just because someone is famous and confident in what they’re saying doesn’t mean they’re experts who know what they’re saying.
“If you could admit a mistake when it’s the size of an acorn, it’s easier to repair than when it’s the size of a tree with deep, wide-ranging roots.”
Larry Swedroe
In today’s episode, Andrew continues his discussion with Larry Swedroe, head of financial and economic research at Buckingham Wealth Partners. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.
Larry deeply understands the world of academic research and investing, especially risk. Today Andrew and Larry discuss a chapter of Larry’s book Investment Mistakes Even Smart Investors Make and How to Avoid Them. In this sixth episode, they talk about mistake number 9: Do you avoid admitting your investment mistakes? And mistake number 10: Do you pay attention to the experts?
Missed out on previous mistakes? Check them out:
- ISMS 8: Larry Swedroe – Are You Overconfident in Your Skills?
- ISMS 17: Larry Swedroe – Do You Project Recent Trends Indefinitely Into the Future?
- ISMS 20: Larry Swedroe – Do You Extrapolate From Small Samples and Trust Your Intuition?
- ISMS 23: Larry Swedroe – Do You Allow Yourself to Be Influenced by Your Ego and Herd Mentality?
- ISMS 24: Larry Swedroe – Confusing Skill and Luck Can Stop You From Investing Wisely
Mistake number 9: Do you avoid admitting your investment mistakes?
As human beings, we’re hardwired to avoid admitting mistakes. And, of course, you can’t correct a mistake unless you acknowledge that your behavior was a mistake in the first place. A typical investment mistake most people make is engaging in actively managed funds and stock picking, even though there’s hard evidence that a vast majority of active managers fail persistently to outperform over the long term.
According to Larry, when you’ve made an investment mistake and have a poorly performing asset, the right thing to do is count your losses and substitute the asset with a superior choice. However, many people don’t want to sell because they’ll hurt their ego. Selling means they have to admit that they were wrong in the first place in making that investment.
So for most people, ego and their inability to acknowledge that they’re wrong are the number one reason they’re stuck in bad investments. Most people, when directly confronted, even with proof that they’re wrong, don’t change their point of view. In fact, they tend to defend it more aggressively. They’ll selectively gather evidence or recall information and interpret it biasedly to reinforce their established beliefs.
Mistake number 10: Do you pay attention to the experts?
According to Larry, you shouldn’t listen to experts. But here, he means experts forecasting what the stock market and the economy will do. You should instead listen to experts quoting scientific or empirical evidence in peer-reviewed journals.
When someone’s telling you exactly what’s going to happen, they’re doing it because they’re overconfident. There’s a good chance they don’t know what they’re saying. In Larry’s opinion, only one thing correlates with the ability to make forecasts; fame. The more famous someone is, the worse their predictions are, probably because they’re just overconfident in their skill sets. People fall for such ‘experts’ thinking they know what they’re talking about because they say things with confidence. Larry insists on ignoring such experts. To drive the point home, Larry quotes the authors of Mistakes Were Made (but Not By Me):
“When experts are wrong, the centerpiece of their professional identity is threatened. Therefore, the more self-confident and famous they are, the less likely they’ll admit mistakes. They Just come up with statements to justify the forecast and explain if only this has happened. If only the timing was different, I would have been right. It was some unfortunate event that occurred that wasn’t forecast. So, of course, that’s why you can’t make forecasts. We can’t predict the future with any persistence better than the market does.”
About Larry Swedroe
Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match.
Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has authored or co-authored 18 books.
Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets.
Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect, Advisor Perspectives, and Wealth Management.