The power of Authority

Yesterday as I watched the Bio-drama based on the life of Social Psychologist Stanley Milgram and it occurred to me that the same reasoning may hold good for why despite plenty of evidence, investors in market believe that by paying some one, their investing results may get better than what it would if they did not.

A very long time ago, I started a website where I wanted to share my system signals with the investor community at large. Of course, this was no philanthropic endeavor as I charged a princely sum of 1K per month. I also changed the way as to how the client paid by having him pay after the month was over (and was profitable) rather than have him pay first without any linkage to actual achievement.

While the site died within a couple of months as the system faltered and barely made any money ( I traded all the Signals personally as well), looking back, it was a very educational experience. I still remember friends of mine who had subscribed to my service (friends acquired via the Social Media rather than the old kind of friendship) claimed that the performance was not so bad since they rather than waiting for my Sell signal had booked profit in the interim (being a trend follower, I till date do not believe that partial profit booking can be a profitable way for systems which attempt to catch the outliers).

Fast forward to today and I see a large number of advisory services (most of them nothing more than a shack in a box) who claim to be able to provide you with the know-how of how to navigate this treacherous market for a small fee per month / year.

Its a well known fact that 95% of traders end up bankrupt over time (friends of mine who are NSE members say this percentage is even higher). Most investors too end up substantially under-performing the markets as a whole. There have been realms of data behind both of these available for quite some time now.

Despite the orgy of evidence that suggests that most of us are better off with simple investment products like a ETF / Mutual Funds, day in and day out people go out and pay advisers, most of whom would be no better than they themselves but for the fact that they seem to talk with a certain Authority.

Its honestly amazing how many are able to talk with such a authority that makes you feel that maybe they have the market all figured out and you the lowly human being are better off subscribing to his service. Come to think of it, this bias does not come due to the evidence you have in hand – while every tip seller claims to have bought untold riches to their subscribers, I know of none who are willing to provide you with a long documented and audited track record.

There are no guarantees in market and I am sure everyone accepts that. Yet, isn’t it amazing that tip sellers want you to trust them with your money (first in terms of subscribing to their service and second in terms of investing your savings based on their advise) without a iota of proof that they actually are able to do what they claim to do?

The other day, some one tweeted this

Most people would rather lose 50% on free advice than make money on a paid one ! 

As is my wont, I tweeted tongue in cheek saying

If Paid Advise could “Guarantee” me my Capital (forget Profit), why not?

Before reading any further, can you think of what I have missed in my reply?

What I missed saying was the time frame. I did not lay out a fixed time frame within which I wanted my capital back. In other words, I left the door open just in case some one felt that he could provide such a service if there was no fixed time frame.

Unfortunately, none caught onto that and instead harped on how even Lawyers and Doctors do not guarantee any results. But that is a outright lie and everyone knows it. Doctors for example are able to treat successfully a large number of ailments and in cases where they can’t, its well known even beforehand.

New evidence that is coming to the limelight (in US specifically) suggests that you may well forget beating the market consistently for a long period, that is not going to happen. Even generating 20% compounded returns is a mission impossible since at some point of time you will have to end up owning more than half the market.

While I myself do not subscribe to any vendor, I do wonder as to what makes a large proportion of investors / traders root for the guys who sell subscriptions despite the fact that they are as blind as others when it comes to knowing whether the guide really has a deep understanding of markets or whether its the Authority bias that makes us believe he knows better and hence not want to question him.

Long time ago, a friend writing in his blog said that if one wanted to really get onto fund management / advisory, the least he should have is a nice car and a nice office. What he left unsaid was whether it was necessary to actually know anything more about the market than the average Joe on the street does.

Over time, I have been able to make friends with a large number of professional investors / traders and one thing I have found in common is that the better you are in analyzing the market, the lower the probability that you have anything to sell.

Remember, the market is the only field where you can survive based on only your knowledge. A doctor, no matter how great he is, has to have patients if he has to put bread on the table. The same holds good for a Laywer / Chartered Accountant / Salesman / ….. No other fields provides one the opportunity to make money sitting in a air conditioned cubicle without having to bother with clients, payment deadlines / strategy meetings and what not.

So, the next time some one approaches you to pay for their services, at the very least, question them on what they bring to the table and what is the proof they know what they claim to know.

“In a World Of Talkers, be a Thinker and a Doer” – Anonymous