Demise of the superstar investor

DIVERSE GROUP IS ALMOST ALWAYS BETTER THAN A SINGLE EXPERT

The allure of the superstar investor can be irresistible. However, as investors, are we confusing strong investment skills with communication skills? Are some people just better at forecasting the future of markets? |

The allure of the superstar investor can be irresistible. You know who they are — the confident, articulate individuals idolised either because of a spectacular non-consensus investment call, the size of their fortune or sometimes because they are simply the most convincing individuals in the room. However, as investors, are we confusing strong investment skills with strong communication skills? Are some people just better at forecasting the future of markets?

Fortunately, there is a lot of research to help answer these questions. A long-lasting US forecasting competition discovered that some individuals are indeed better at forecasting than others, so evidently some people are, indeed, better at forecasting markets than others. However, the evidence also shows that a diverse group is almost always better than a single, ‘superstar’ expert, no matter how good the expert is.

Your favourite ‘expert’

Visualise your favourite ‘expert’ from a field of your choice. What makes them authoritative in your eyes? For some, it is their record of achievements. For others, it is their convincing, authoritative style of communication. For others still, it could be their clarity, simplicity or even their entertaining style.

Predicting future is a skill

In a recent book Superforecasters, University of Pennsylvania Professor Philip Tetlock tells the story of the Good Judgment Project, an initiative by the US Intelligence Advanced Research Projects Activity.

One of the most interesting findings of the study was that there indeed were small groups of individuals who were sustainably better forecasters than the rest. The author summarised the key characteristics of such ‘superforecasters’:

■ 1. A philosophic outlook that is cautious and not deterministic;

■ 2. A thinking style that is open-minded, curious, reflective and numerate;

■ 3. A forecasting style that is pragmatic, thinks in terms of probabilities and is “dragonflyeyed” (i.e. one that incorporates inputs from a variety of sources) and

■ 4. A ‘gritty’ work ethic where individuals are willing to work hard to grow into good forecasters.

Who should you listen to?

These conclusions may make you believe that hiring a ‘superforecaster’ may, in fact, lead you to the best investment outcome, even if their desired personality does not make them exciting social company.

Research would suggest more is better, but the group of forecasters must be diverse. In a 1999 paper, Beth Azar notes that ‘collectives’ tend to perform better than individuals when the task at hand involves probabilistic outcomes. Another research paper by PNAS (Proceedings of the National Academy of Sciences of the USA) showed that stock pickers who were part of diverse teams were 58 per cent more likely to price stocks correctly compared to those in more homogenous groups.

While superstar investors or specialists do a great job as experts in their own field and/or as excellent communicators or entertainers, as investors we are likely to do better by applying the principles of diversity and ‘superforecasting’. For us at Standard Chartered, these principles are key ingredients behind our investment philosophy, because we genuinely believe they should lead to better investment performance over time.