As an investment organization, we avoid talking about politics. While the choices of elected officials impact tax and economic policy, among many other things, our focus at AAII is to help you become a better investor.

So it may seem a bit odd to include an interview with Philip Tetlock in this month’s issue. Tetlock is the Leonore Annenberg University Professor in Democracy and Citizenship at the University of Pennsylvania. Rest assured, we are not getting political.

Tetlock has expertise in forecasting. His book “Superforecasting: The Art and Science of Prediction” (Crown, 2015) discusses seemingly ordinary people with extraordinary soothsaying skills. I’m not talking about one or two good calls, but many correct predictions. What’s remarkable is how these superforecasters fared against the experts in fields such as national intelligence. In a forecasting tournament, they were far better than the experts. When the superforecasters started working together, their advantage over the experts became even larger.

Among the keys to the superforecasters’ advantage are their open-mindedness, their willingness to change their opinions in reaction to new information and their understanding of probabilities. All three of these traits tend to be missing from political mindsets. If these traits are not in your investment mindset, they should be.

Among the best ways to be exposed to new information is to read. Credit Suisse’s Michael Mauboussin highlighted the reading habits, among other attributes, of great investors in a recent report that we’ve summarized in this month’s Briefly Noted. Not only do the great investors make time to read, Mauboussin says they read about a wide variety of subjects.

Exposing yourself to new ideas works only if you are willing to change your opinions when new information warrants so. Investments and the economy are never static; they change over time. Though we might think a company will continue to be great in the future, it may not be. Blackberry—once the king of smartphones—recently stopped production of phones with its iconic keyboard. Similarly, interest rates have yet to rise the way many strategists, economists and pundits said they would. When the facts change, so should your opinions. Changing your opinion is not flip-flopping, it’s being rational.

A change in the facts should also change your assessment of how probable an event is. Among the definitions Merriam-Webster gives for probability is “the chance that a given event will occur.” While it may seem silly to quote this definition, think about how accurate you view weather forecasts as being. If it storms on a day projected to only have a 30% chance of rain, do you think the weather forecaster is good? As Tetlock points out in his book, the forecaster would be good if it rains on approximately 30% of all of the days the meteorologist says there is a 30% chance of rain. (I encourage you to see the discussion Tetlock and I had regarding probability, uncertainty and forecasting accuracy here.)

Unfortunately, being flexible and communicating nuances doesn’t always inspire confidence. People like quick sound bites and strong opinions. We’re more drawn to the person who speaks with confidence and charisma even though confidence and charisma have absolutely nothing to do with being correct. No matter how strongly and confidently a person communicates their beliefs and no matter what their feelings are, the facts do not change. (If the person has the ability to influence the outcome, the statistical odds may change, however.)

Ultimately, the future will unfold in ways most of us aren’t even considering. Seemingly random events can and do happen. While the best forecasters can sometimes foresee the chain of events unfolding (surprises can and still do happen), the predictions you and I are most likely to see publicized are those with little scrutiny of the forecaster’s track record. As such, we should downplay them. More importantly, we should adhere to a replicable, disciplined process for investing based on what has been proven to work over the long term as opposed to what we think might happen in the future.

Wishing you prosperity, 

Charles Rotblut, CFA
Editor, AAII Journal
@CharlesRAAII