PART il

THE EXPERT WAY TO LOSE YOUR SAVINGS

Dangerous Forecasts

In Oscar Wildes classic novel, The Picture of Dorian Gray, the protagonist enjoys all the dissipations late-nineteenth-century London can offer without showing the slightest sign of wear or tear. Today you might suspect a skillful plastic surgeon was lurking in the background, but Dorian Gray had discovered a simpler method. He had a portrait, carefully hidden away, that showed all the results of his debauchery, while his own visage remained youthful and pure to the world.

Unfortunately, that picture would eventually be his undoing, as is often the case in an adult morality tale. Yet, with a little stretch of the imagination, I think we can find another portrait that reflects the same division between outer appearance and inner truth. It will not be of a particular person, but rather of the class of people generically best known as experts. In particular, well want to recognize the portraiture of the experts who forecast the performance of stocks or markets. They, too, seem to pass through life unblemished by inaccurate predictions or poor stock choices, even though the true picture drawn from the latest research will accurately show every statistical wrinkle, scar, wart, and sagging chin.

As a society, we have always had a schizophrenic attitude toward experts. On the one hand, when we want their help, we rush to them, and breathlessly await their utterances. But if we dont need them and look objectively at their performance, our attitude is often less reverential and more colored with amusement, or even downright skepticism. With good reason. Experts are often wrong-sometimes remarkably so.

The stock market, for the reasons demonstrated in this chapter and the next, is a prime place for major expert errors-mistakes that cost many

A Portrait of Dorian Guru

Americans have always believed technology is the key element in advancing our standard of hving and quality of life. Well, not quite always. The commissioner of the U.S. Office of Patents, in urging President William McKinley in 1899 to close down the patent office, said, "Everything that can be invented has been invented." In 1901, Wilbur told Orville, "Man will not fly for fifty years." The Wright brothers flew on December 17, 1903.

Military history has its share of experts who missed the mark by more than a little. "The army is the Indians best friend," said one well-known American brigadier-general. His name-General George Custer. Unfortunately, the Indians didnt share his belief, as they attested at the Little Big Hom River in 1876. Other American military experts have proven as savvy. In August 1941, Captain William T. Pulleston, the former chief of U.S. Naval Intelligence, stated, "The Hawaiian Islands are Over-protected; the entire Japanese Fleet and Air Force could not seriously threaten Oahu." Said Secretary of the Navy Frank Knox on December 4,1941, "No matter what happens the U.S. Navy is not going to be caught napping." Three days later the officer in charge of radar at Pearl Harbor was told by a subordinate that a radar signal indicated at least 50 planes, possibly far more, were approaching Oahu at almost 180 miles an hour. His reply, "Well dont worry about it.. . its nothing." The military experts, after all, were assured by some of the keenest diplomatic minds America has ever produced. John Foster Dulles, the Secretary of State who was influential in shaping American postwar

investors a good part of their savings. It is important for you to know just how insidious these errors can be, and how difficuh they are to avoid. To succeed in the marketplace youll have to go back and "unlearn" many of the bad habits in which we have all been schooled. Just as a good golfer may have to unlearn a bad swing, forgetting much of what he relied on in the past, or a good tennis player her serve, so it is in markets. Here we must leam to live without our dependence on experts, taught us from our earliest days as investors. For the reasons Ill discuss, it will prove tougher than overcoming that slice in golf or that blah serve in tennis. But when you see how dramatically it improves your odds in the market, Im sure youll want to give it a try.

What we shall see first is that it is not only the poor stock market forecaster who is off the mark repeatedly. No, the problem of expert error is universal, as the following examples illustrate.