January 21, 2016

Whose Word Can You Trust?

Recently I came across a video of a highly respected fund manager in which he offered personal finance advice to investors in general.  One of the things he spoke about was asset allocation.  On checking around, I gathered that a number of people had found what he had said to be worthwhile.  It wasn’t clear as to how widely the video had been watched online, but on one portal there were five times more ‘likes’ than ‘dislikes.’  Here’s the problem: the fund manager’s views on asset allocation were flawed and misleading.

There is a certain personal finance blog that is written by a gentleman who apparently has no professional experience as a financial advisor.  To be fair, he is better versed in matters of personal finance than an average investor.  But that’s probably the best that I can say of him.  I have read posts in which he has distorted facts, made false claims, and expressed views that are flawed and downright ridiculous.  Despite all of this, his is one of the most popular personal finance blogs in India and a number of readers appear to blindly trust anything that he has to say.

These are not isolated instances.  There are countless personal finance blogs written by people who have no grounding or experience in that subject.  And I frequently come across experts waxing eloquent beyond their ken.  Sadly, far too many of us are falling for the questionable advice being dished out by these individuals.

So how can we distinguish an expert from a non-expert?  How can we know when to trust an expert?

The plain truth is that there is no foolproof way.  If you think about it, only an expert can truly know if someone else is also an expert.  The rest of us have to make a presumption about an individual being an expert.  At best, we may have, what some call, a justified belief of a person’s expertise.  I give below some thoughts on how we might build such a belief.

Understand the area of expertise: Thanks to the business channels on television, for a number of us, there is an enduring image of an “investment expert”:  someone who can explain why the stock markets moved the way they did on a given day, predict how they are likely to perform in the next few days, and advise on the suitability of buying or selling a given stock.  This is a highly dubious stereotype.  For one, it is debatable as to whether short term forecasting can be an area of expertise.  For another, there is a lot more to investing than just analyzing stocks.  In fact, the landscape of investing is too vast for anyone to be an expert across all its aspects.  Fund managers and analysts, while competent in matters of researching securities and analyzing the macro environment, are hardly qualified to advise on matters of personal finance.  Financial planners and mutual fund advisors, while better placed to advise their clients on asset allocation and selection of mutual fund schemes, are rarely equipped to analyze stocks.  Knowing an expert’s area of expertise helps in noticing when he/she strays from it.

Look for indicators of expertise: To some extent, one’s academic credentials and certifications can be an indicator of his/ her expertise.  Personally, I regard professional experience and testimonials from known or proven experts as better indicators.  But more than that, I look for clues in what a person is saying.  Are there any factual inaccuracies?  Is there a clear logic in what is being said?  Are all points consistent with each other? 

Watch out for conflict of interest: Good intentions are by no means a substitute for expertise but questionable motives can dent the credibility of an expert.  A number of fund houses are known to insert subtle (and not-so-subtle) promotional messages in their so-called investor education programs.  And there are a number of bloggers who focus more on their ad revenues and search engine rankings rather than the quality of their content.

Listen to your instincts: Each one of us has an in-built warning system.  Mine makes me uncomfortable with individuals who trumpet their credentials.  I am also wary of those who make assertions without sufficient evidence.  And I tread particularly cautiously when such assertions are made with a high degree of confidence.

Ask Questions:  If still in doubt, do ask questions.  For more on this, check out this post.

In case you’d like to dig deeper, check out this piece that summarizes and expands upon some of the best research on the subject of assessing expertise and trusting experts.

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