Failure to call the market is no fluke
Patience helps, too. It's well known - I'm sure I've mentioned it - that you just have to stick with a half-decent stock long enough to make money because profits will grow with the economy.
With a speccy stock, you'll do well or do your dough due to the extra risk. Unfortunately, if it doesn't keep you awake at night, forget thinking you can earn a sensational return. Unless, of course, you fluke it.
Which brings me to British-based Warwick Business School's study. It found flukes make our experts, well, experts.
After poring over three years of quarterly interest-rate and inflation forecasts quoted in The Wall Street Journal, Warwick's academics were astonished to find that an expert who got one quarter right then went on to become the worst at predicting the next one - or indeed, any others. Not just worse, but the worst. In the words of our academic friends, "those well-known experts who had pulled off a big windfall by going against the tide and winning were, over the long term, the worst at forecasting". So the very traits that prompt a brave prediction can produce "one hit among many failures".
It's a pity they didn't study brokers or fund managers, but you'd expect the same result. It's virtually inevitable - barring a lucky break - that the best fund manager one year won't be the next. In fact, they're likely to be one of the worst.
Where skill does come in seems to be less about expertise and more about tripping up the brain's built-in biases.
Take the self-defeating tendency to buy at the top of the market and sell at the bottom. The reason is feedback: everybody says values are going up, so they must be. Better hop aboard before you miss the bus. Never mind that a stock rising towards its peak price is riskier, with much further to fall potentially, than one that's dropping to its bottom.
In a study spanning five years, the Warwick mob also discovered that the more often that entries for 30 stocks in the Dow were viewed on Wikipedia, the more likely they were to fall. Yes, fall. The reason is that losing money hurts harder than missing an opportunity to make it. The pain of losing $10 at the casino is more intense and longer lasting than the thrill of winning $10, something psychologists have known for a long time. Our academics therefore concluded that it was the most worried who were consulting Wikipedia.
Just in case this result wasn't also a fluke, they looked up the number of page impressions of actors and filmmakers and found no connection to making money. All right, so they're academics.
Another classic is experiments that show we're more prone to act on information that confirms our view than something that challenges it. There's even a name for it, "confirmation bias". Yet another recent study shows investment bankers, like everyone else, underestimate the odds of a catastrophic loss. And given the choice of half-a-dozen investment options for super, you'll either do nothing or just go with the default option. Go on, admit it.
Sorry, neither is likely to prove the best choice. So don't blame the markets any more. It seems we're our own worst enemy.
Twitter @moneypotts
Frequently Asked Questions about this Article…
The article argues that luck plays a bigger role than most admit — one-off correct calls can be flukes. Real skill, the piece suggests, is less about predicting markets and more about avoiding psychological traps that make investors overtrade or chase unlikely wins.
Patience matters: sticking with a decent stock long enough often pays off because profits tend to grow with the economy. The article stresses that long-term holding beats frequent trying to time the market for sensational returns.
The article warns against chasing speccy (speculative) stocks unless you can tolerate extra risk and sleepless nights. While you might ‘fluke’ a big win, speculative stocks are more likely to either make you or break you, so they’re not a reliable path for most investors.
Warwick’s study found that experts who make a big, contrarian win one quarter often become the worst forecasters afterward — suggesting that standout successes can be flukes rather than repeatable skill. The study implies top short-term performance in forecasts or funds is rarely sustained.
The article explains this self-defeating pattern as driven by feedback and crowd behavior: rising prices make people believe values will keep going up, so they hop on late. That creates a bias to buy when risk is higher and sell when prices have already fallen.
According to the Warwick researchers cited, stocks whose Wikipedia pages get viewed more often were more likely to fall — likely because worried investors search for information when holdings are dropping. The article notes this link was specific to stocks and not seen for actors or filmmakers.
Confirmation bias is the tendency to prefer information that supports your existing views rather than info that challenges them. The article points out this common bias leads investors to act on reassuring news and ignore warning signs, which can harm returns.
The article mentions studies showing people often do nothing and stick with default super choices because of inertia, and even professionals underestimate the odds of catastrophic loss. Combined with loss aversion — feeling losses more intensely than gains — this makes poor or passive choices more likely.
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