You may have heard of the one about the broken clock. Look up at the wall. If the hands aren’t moving on your favourite clock it’s not going to give you the correct time. Yet as the hands don’t move, the time does. Every twelve hours the clock will line up with the correct time and strike gold. Stretch it out to 24 hours and your stopped or broken clock is right twice in a day.
It’s a useful proverb or phrase if you want to explain away some accidental success or good fortune against the odds. Maybe a unreliable person finally got something right. In investing or economics, it’s an appropriate way to deal with forecasting. Most forecasters are broken clocks. No one can see the future. There’s a litany of people who make forecast after forecast. Most are wrong, but when they get one right, they boast about their foresight and sweep every previous failure under the rug.
Less well known is the inverse stopped or broken clock.
In contrast, this is someone who is always rational, reasoned and makes the right decisions. Then they do something completely out of character, believe something illogical or make a snap decision based on emotion or guessing at the future.
Why might this be? It might be fanciful to believe we can all make the best decisions 100% of the time. Maybe they’re under pressure and lacking clarity. Maybe they’re out of their comfort zone. Or maybe their expertise is being applied out of context. Veering off course unexpectedly to make an out of character decision may mean someone has simply taken the expertise and knowledge that serves them well in one area and applied it to an area where it doesn’t quite belong. Their lens of expertise sees something with clarity in their own area, but it doesn’t translate elsewhere.
Take COVID-19 as an example. Various experts may have an insight into the virus from different angles. A businessperson who has dealings in China. A doctor or nurse who has medical training and an understanding of the human body. An epidemiologist who studies disease, has insights into how a virus spreads and can map those most likely to be affected.
All these people are knowledgeable and credible in their own way. What would you think if they boldly announced they’d sold all their investments in response to COVID-19? It might be unnerving.
“What do they know that others don’t?”
“They must have some insight given their knowledge!”
Yes and no. What they see might rightly be alarming to them. The impact on business. The impact of the virus on the human body. The way the virus spreads.
How successfully does any of it translate to investing? It doesn’t. Their insight and knowledge becomes a hindrance and a cloud to making decisions beyond their realm. One intellectual skill set isn’t necessarily transferable to another. More specifically, in this instance of investing, they’re taking their intellectual skillset and reapplying it to the non-intellectual area of another domain. In other words, they’re using their well-practised skillset to justify making a prediction about the future.
The intellectual parts of investing are the parts based on evidence and academia. Hundreds of years of data illustrating how markets work. The concept of risk and return. How assets contribute to portfolio performance. Diversification as a way to minimise overexposure to a security or sector.
Discipline is the final piece. It’s the one part of investing that’s not intellectual. It’s attempting to control an urge or emotions. For that reason, it often does the most damage. It’s hard to counter when an investor mistakes their feelings for facts.
It’s logical to believe markets will respond to news events. They always have. Sometimes there’s a delay, but information is always priced in. COVID-19 was a piece of information that carried huge concern. Stockmarkets priced it in violently. Both positively and negatively. Most were only able to imagine the negative. The virus required a reaction, and this provoked the positive.
The businessperson, the medical professional and the epidemiologist may have understood negative implications of COVID-19. That was their lens. They didn’t see the positive investment implications and response to COVID-19. That wasn’t their lens.
We exist in a world where central bank and government intervention occurs. A government mandated lockdown had to be accompanied by a government mandated program of support. Providing liquidity is something central banks have done for some time now. They weren’t going to abandon that program in the middle of a global pandemic.
Expertise, experience and knowledge are vital to someone’s profession. Outside their profession they may combine to become a hindrance. Sometimes acknowledging this isn’t easy, especially if someone considers everything an intellectual pursuit or has an urge to be right.
And the easiest way to always be right? Having the ability to recognise and understand the boundaries of one’s skill set.
More bluntly, George Orwell once said “the range of knowledge is so vast that the expert himself is an ignoramus as soon as he strays away from his own speciality”.
Knowledge and credentials ‘seemingly related’ to the matter at hand may appear convincing. Just be careful they don’t stop your clock when you really need to know the time.