Who Will You Take Your Financial Advice From?

SVB recently wrote about how some people have benefited from Cramer’s show over the years and long time viewers are likely to stick to his defense, even as casual followers tune out — given the recent mistakes he made.

The question is — if a financial advisor failed seeing this coming; would you still take his advice?

This question is not about Cramer though, it is about financial advice in general and who you would turn to: for your financial advice.

But, before answering that question, we need to address another —

Do you really heed the financial advice of experts?

To answer this question, let’s take a look at some current examples.

So far, I haven’t seen any one who predicted the current crisis with as much clarity as Peter Schiff. If you don’t know about Peter Schiff yet, take a look at this video before you read any further.

This video is about two years old, so you have to be impressed by the clarity with which he discusses the recession. There are plenty of other videos like this and his message is essentially the same.

His advice right now is for investors to buy gold and foreign stocks, and his prediction is that the dollar will crash in value in the next few years.

So would you follow the advice of someone who got it exactly right?

My guess is –  only partly.

Because its hard for most people to really visualize a collapse in the value of dollar and so they are at odds with what he says. So even though he was exactly right on the current recession, its difficult to follow his advice in entirety, as it is at odds with your own view of the world.

The other argument against following is advice is that: sure, he got it right once, will he get it right again?

This is a fair argument, but what about someone who got it right consistently?

What About The People Who Consistently Got it Right?

On October 16, 2008 — Warren Buffet wrote an Op-Ed in the New York Times. In that he wrote:

“So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.”

This is a pretty strong statement made by arguably the most successful investor of the world. Yet, how many took his advice?

Not many. Fear was all pervasive at that time (and even now) and it had people in such a strong grip that they couldn’t believe that the stock market will ever go up.

Buffet’s advice at that time was fundamentally at odds with the world view that most people held and therefore it was difficult to heed his advice.

What is common between Schiff’s Video and Buffet’s Op-Ed?

Schiff predicted the housing market crash right at the time when it was peaking. The market was full of euphoria and optimism. Schiff’s voice was drowned out in the sea of good news.

Similarly, Buffet speaks of the stock market going up, right before it hits 12 year lows. His voice of optimism was drowned out in the sea of bad news that was all pervasive at that time.

Both of them were going against the grain.

For most people, this is a very hard thing to do in stuff they understand and deal with every day, but to go against the grain in stuff like stocks and economy is almost always out of the question.

In fact, when you saw the video your first (or second) reaction would be Laffer is an idiot. However, if you have ever studied the Laffer Curve in your economics class — this is the same guy. He has a popular economic theory after his name, which is taught in school and he got it absolutely wrong with respect to the current crisis.

We Heed Selective Advise

As humans we listen to all sorts of news and opinions on TV, Radio, Newspapers etc. and then filter out the views that are not consistent with our world view.

When you say you follow Cramer’s advice, I bet what you really mean is that you follow his advice that you agree with and not all of his advice.

And this is the main point: if you follow someone’s advice selectively then you shouldn’t really point a finger on that person.

As to the question of abandoning someone because he got it wrong, if there is no fundamental shift in the way you think, then even if you dump Cramer, you will adopt someone else who preaches the same thing, but maybe in a different manner. If there has been a fundamental shift in the way you think, then you will listen to people who preach a different message.