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What to do when everyone is right

Investor John Hussman has bad news. Corporate profit margins are at an all-time high, and bound to fall, he says. That’s going to crush profits and cause the market to drop. He makes a convincing case with charts and lots of historical data. He has a PhD.

Wharton professor Jeremy Siegel calculates profit margins a different way, totalling up the income of all businesses and partnerships, not just corporations, and comes to a different conclusion. By his metric, profit margins aren’t that out of line at all. He thinks the Dow Jones could be on its way to 18,000. He makes a convincing case with charts and lots of historical data. He also has a PhD.

Who is right?

It depends how you feel about the market. If you’re bearish, you’ll side with Hussman, and use his analysis and credentials to confirm your views. If you’re bullish, you’ll follow Siegel, and use his insight to rationalise your feelings.

Everyone can back up their own views with their own data using their own preferred metrics. The problem is that equally smart people can argue the exact opposite point and sound just as convincing. “Truth” and “fact” just become whatever you prefer to believe. Everyone thinks they’re right. And that’s really dangerous.

Most of this can be explained by John Kenneth Galbraith’s wisdom: “Pundits forecast not because they know, but because they are asked.” No one with a PhD or an MBA or “Goldman Sachs” on their business card will ever dare utter the words, “I don’t know.”

Curiously convinced of their intelligence, they make predictions. But since most of these predictions are really just emotional fuzzy feelings, those touting them go on a data-mining spree until they find the evidence they need to back up their preconceived notions.

And part of it is explained by our pundit culture. To make it as a pundit, all you have to do is be right on one big, bombastic prediction. If you say the market will fall 5% and you’re right, no one cares. If you say the market will fall 50% and you’re right, you’re a god who can command five-figure speaking fees for life. So the media is dominated by wild, far-out predictions, most of which can only be rationalised by looking at a cherry-picked sliver of the data.

What can you do about it? I’d recommend three things.

1. Ignore most predictions, especially hyper-specific ones

I’ve always loved Carl Richards’ line, “Risk is what’s left over when you think you’ve thought of everything else.”

Coming to terms with how awful the collective track records of market predictions are is quite liberating. Ignoring predictions forces you to think about the economy with an appreciation for how random and unpredictable things are. Will there be a recession year? I don’t know, but my portfolio could take it if there is. Will there be another big market rally? I don’t know, but my portfolio will enjoy it if one comes.

2. Think more like Darwin

Berkshire Hathaway’s Charlie Munger loves to talk about Charles Darwin. Darwin, Munger says, wasn’t abnormally smart, but he had a unique outlook on science in that he was practically allergic to confirmation bias. While most people form a theory and then seek information that proves it right, Darwin spent most of his career desperately trying to prove himself wrong. Munger once said:

He [Darwin] tried to disconfirm his ideas as soon as he got ’em. He quickly put down in his notebook anything that disconfirmed a much-loved idea. He especially sought out such things. If you keep doing that over time, you get to be a perfectly marvellous thinker instead of one more klutz repeatedly demonstrating first-conclusion bias.

Economists and investment analysts should do the same.

3. Surround yourself with people who disagree with you

Realising that there are two sides to each story makes it imperative that you hear both stories. Whenever you get a great investment idea, or have an opinion on where the economy is headed, find someone who disagrees, and hear them out. At worst, you continue to disagree. More often, you’ll gain valuable insight. Surprisingly, I think many don’t do this out of fear of being persuaded away from the opinions they’re most comfortable with, even if they know they’re wrong. Or as Andy Rooney put it, “People will generally accept facts as truth only if the facts agree with what they already believe.”

Don’t let that be you.

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The Motley Fool’s purpose is to help the world invest, better. Click here for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Morgan Housel, originally appeared on fool.com.

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