Monday, March 30, 2009

Who is your Propane or Heating Oil Expert?

The Jim Cramer - John Stewart debate has lit up the national discourse on a good topic - the value of an expert. Jim Cramer is an expert to a section of the stock buying public - but his advice hasn't worked out so well of late. There are only a few folks that have done well in this market, and those investors are to busy counting their money to do a TV show.

But this does highlight a few valid questions - How do we choose the people we trust? And what qualities make a person an expert?

Last week, Nicholas Kristof wrote an excellent op-ed piece in the NY Times. It was on the "Dr. Fox effect." The whole article is worth a read, the following is an excerpt:

The best example of the awe that an “expert” inspires is the “Dr. Fox effect.” It’s named for a pioneering series of psychology experiments in which an actor was paid to give a meaningless presentation to professional educators.

The actor was introduced as “Dr. Myron L. Fox” (no such real person existed) and was described as an eminent authority on the application of mathematics to human behavior. He then delivered a lecture on “mathematical game theory as applied to physician education” — except that by design it had no point and was completely devoid of substance. However, it was warmly delivered and full of jokes and interesting neologisms.

Afterward, those in attendance were given questionnaires and asked to rate “Dr. Fox.” They were mostly impressed. “Excellent presentation, enjoyed listening,” wrote one. Another protested: “Too intellectual a presentation.”
Scary, huh? A good presenter = an expert. Or maybe an "engaging talking head" = an expert (Jim Cramer, maybe?).

Ben Stein goes further to put this in perspective in another NY Times editorial:
Humans can’t consistently pick the right stocks or call markets, foretell political or geopolitical events or successfully predict changes in interest rates or commodity prices.

Life is far too complex and baffling for the minds of mortals to understand it as it happens, let alone to predict it accurately. (I am mindful of how Professor Friedman, a true supernova of brilliance, said of economic forecasting, “If you’re going to predict, predict often.”) Some humans shine like dazzling stars when their predictions turn out to be true, but those same humans can’t ever be counted on to replicate the feats regularly.

Yet, we cry out for someone to tell us the future, like children who want to hear the end of the story. When Mr. Cramer tries to satisfy that need, he is doing no more than answering a deep human wish. But he — and everyone else in a similar situation — should make it clear that these are no more than opinions and guesses, which could easily be wrong and often are.

This is not just boilerplate. This is life. The way it is.
So where does this leave us in our search for market wisdom? What is a retailer to do when he or she realizes that no one can predict the future with consistency and that "the folks that know aren't talking?"

Reevaluate who you trust. What questions do they ask? Do they understand your balance sheet, your customer base, and your business processes? If they don't, they might be a "Dr. Fox" - a false expert.

The value of a market expert is not in helping you make only good decisions. The value of a market expert is to help you understand - in advance - the impact of a bad decision, and then to assist you in steering your business clear of the kind of mistake that it cannot afford.

Before you make your next risk management decision, consider the trader's axiom "The market can remain illogical far longer than individuals can remain solvent." If your purchase decision can withstand the clarity granted by this statement, then it is probably a hedge. If not, you might wind up as frustrated with your "expert" advisor as Stewart was with Cramer.

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