ROBERT SHILLER, in his book Narrative Economics, argues that stories can be a powerful force in moving markets—more so even than facts or data. Recently, I gained a better understanding of why that’s the case.
I was speaking with a fellow and, it seemed, we disagreed on nearly every topic. But the way he presented his arguments made them sound surprisingly persuasive. What I realized is that, in the world of finance, storytellers have a diverse toolbox for convincing people of their point of view. As an individual investor, it’s important to be alert to these strategies. Here are the ones I’ve encountered most frequently:
1. Fame. In the world of finance, there are some surefire routes to fame. One is to accurately foretell the future. Perhaps most notable in this category is investment analyst Elaine Garzarelli. On Oct. 12, 1987, Garzarelli appeared on CNN and delivered a bearish outlook for the stock market. Just one week later, the market dropped 22%, its worst ever one-day decline. A week after that, The Wall Street Journal crowned her a “star prognosticator.” Her reputation was sealed.
More recently, hedge fund managers John Paulson and Michael Burry both foresaw the meltdown in subprime mortgages that precipitated the 2008 financial crisis. Both were able to bet against these mortgages and made fortunes. Paulson’s success was chronicled in a book titled The Greatest Trade Ever. Burry was featured in The Big Short, which was also turned into a movie.
Other fund managers have become famous by beating the market in dramatic fashion. Bill Miller outperformed the S&P 500 for 15 years in a row—still a record. Cathie Wood gained fame in 2020 when her ARK Innovation Fund soared 153%.
Because of their singular achievements, these five, among others, continue to be revered. That’s despite subsequent stumbles. Elaine Garzarelli’s track record since 1987 has been unremarkable. John Paulson, after his big win in 2008, started a new gold-focused fund that was lackluster. Michael Burry has warned that index funds carry systemic risk, a prediction that hasn’t panned out. After his 15-year run, Bill Miller’s fund gave back much of its accumulated outperformance. Cathie Wood’s ARK Innovation Fund lost 23% in 2021, when the overall market gained 29%, and it’s down almost 58% so far this year.
I recommend avoiding market seers. Yes, it can be tempting to tune in to predictions when they come from someone with a notable track record. But the more impressive the track record, the more cautious I would be. It might be possible to catch lightning in a bottle once, but it’s a tall order to replicate that feat.
2. Credentials. Last summer, I met a new neighbor. Within the first five minutes, he found a way to let me know he’d gone to Harvard. There’s no denying the prestige of an institution like that. But prestige doesn’t necessarily translate into financial wisdom.
A recent example occurred in the U.K., where a well-known fund melted down. It was particularly surprising because the fund’s manager was Neil Woodford CBE, an investor with a previously distinguished record. What does the CBE stand for? That’s a Commander of the Order of the British Empire—a high honor in Britain. The lesson for investors: There’s nothing wrong with credentials. But don’t let folks tell you stories—or, worse yet, sell you something—just because they have a fancy diploma or fancy initials after their name.
3. Facts. Another strategy used by skilled storytellers is to employ very specific—often arcane—facts. The fellow I referenced at the start of this article, for example, knew certain stock prices to the penny. He spoke knowledgeably about Federal Reserve chairs from the 1960s. He knew the price of oil at various points in the 1970s. He knew how much Harry Houdini had paid for his house. These very specific facts added a veneer of authority to his arguments. It gave the appearance that he had an unlimited reserve of information and thus, by implication, shouldn’t be questioned.
Trouble is, facts about the past don’t necessarily translate into logical opinions about the present or accurate forecasts about the future. Always be wary of bluster, even when—and maybe especially when—it’s supported by very precise facts and figures.
4. Self-confidence. I recall riding in an Uber with a driver who didn’t hesitate to share his unconventional views. He asserted that the Federal Reserve was not a U.S. government entity but instead owned by the Rothschild family. The Rothschilds also controlled the White House, he said. Instead of debating him, I suggested he might want to confirm this information. His reply: “I have confirmed this many, many times, my friend.”
His information was obviously absurd. But it occurs to me that this is another strategy employed by storytellers—to assert opinion as fact and to further assert, with supreme confidence, that the information has been well researched. It seems like it shouldn’t work, but it’s remarkable how easy it is to fool people just by saying something with an outsized dose of self-confidence. Beware of those who never display a shred of doubt.
5. First-hand knowledge. Some years ago, I remember someone starting a sentence, “When I met Bill Gates, he told me….” Everyone leaned forward in their chairs. That’s another strategy storytellers use to add credibility. But while first-hand accounts may be interesting, they’re nonetheless still anecdotal, susceptible to one person’s recollection, subject to interpretation and potentially outdated. Listen to them for entertainment, but don’t put too much stock in these kinds of stories.
6. Market prices. If you chart the frequency of Google searches for bitcoin and then chart the price of bitcoin, you’ll find that they look a lot alike. In other words, interest in bitcoin increases when its price increases. That probably seems intuitive, but it highlights a cognitive bias that storytellers can use against us: We become more interested in things when their prices go up. Logically, of course, we should become more interested in an investment when its price goes down. But to do that is counterintuitive, and it’s just not how we’re wired. Instead, for better or worse, we look to market prices for validation.
That’s a problem because market prices are simply the aggregate of many individuals’ thinking. Just as any one person can be wrong, so too can many individuals. The lesson: Don’t let anyone tell you that an investment is good simply because its price has been going up.
7. New things. Howard Marks, in his latest memo, quotes John Kenneth Galbraith. “There can be few fields of human endeavor,” Galbraith wrote, “in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”
In the dot-com bubble of the 1990s, the internet was, of course, the “wonder of the present,” and a key buzzword was “eyeballs.” Corporate profits, we were told, didn’t matter. Instead, it only mattered that these new companies were gaining users’ attention. In the end, of course, profits did matter—as they always do. But for a time, skeptics were dismissed as old fogeys who didn’t understand this new era. Today, the equivalent may be cryptocurrencies or nonfungible tokens. To many, they look like the emperor’s new clothes. But just as with past manias, their supporters are working overtime to discredit critics by claiming that they just don’t get it.