Asking the right questions

In the movie, I, Robot, James Cromwell playing the part of Dr. Alfred Lanning make the following statement.

I am currently exploring the field of Data Analytic’s and Algorithmic Trading. One key aspect of this compared to the other ways of Analysis (Technical Analysis for example) is that one needs to throw the right questions to be able to get answers that can help us understand market actions better and in that way enable us to make the right decisions on When, What and How much to Buy / Sell.

In advertisements of Maruti, the key question that gets asked is “kitna deti hai”. While this is supposed to go with the Indian mentality of looking at the maximum mileage for money (fuel), the question that does come up is, Is that really the biggest question for a probable Car Owner. Yes, mileage is a important parameter, but how much important is it when compared to say a factor like Safety?

In the Mutual Fund / Stock Market arena, every adviser seems to suggest that without his guiding light, its easy to get lost. Assuming that is true, what are the right questions to ask such advisers? What are the right questions to ask?

Is asking about performance (of the past) a good question? Most advisers suggest a set of funds to Buy based on multi year performance. Stocks that have shown momentum in the past are seen as potential candidates to provide the best returns in the future as well. But how true is this given the fact that there is a large amount of Survivor Bias that is build in.

These days I am finding advisers providing solutions which supposedly address long term goals such as Retirement / Marriage / Education, etc. As much as the idea is nice, how many clients ask the details behind how they come up with both the list of funds to buy and the amount to buy (based on what we want at the end of X years). Much of these calculations are based on projections on how the market shall perform, the interest rates one can foresee in the future, the inflation we may face among other macro ingredients.

When Economists get long term views wrong, what are the chances your adviser shall get those numbers right? As much as one understands the variability of such forecasts, one does wonder what is the worst case scenario since as we come closer to the target area, there is little time to make up for major deficiencies.

In most industries, if you deliver your client a shoddy product, not only shall you lose the client but also may have to miss the payment due from him. Investment advisers do not leave that door open as they ensure that perform or not, they receive their dues well before the time of delivery. Isn’t it time to ask them, Why?