ISMS 25: Larry Swedroe – Admit Your Mistakes and Don’t Listen to Fake Experts

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Quick take

In this episode of Investment Strategy Made Simple (ISMS), Andrew and Larry discuss two chapters of Larry’s book Investment Mistakes Even Smart Investors Make and How to Avoid Them. In this sixth episode, they talk about mistake number 9: Do you avoid admitting your investment mistakes? And mistake number 10: Do you pay attention to the experts?

LEARNING: You’ll only learn from mistakes if you admit that you made them. Just because someone is famous and confident in what they’re saying doesn’t mean they’re experts who know what they’re saying.


“If you could admit a mistake when it’s the size of an acorn, it’s easier to repair than when it’s the size of a tree with deep, wide-ranging roots.”

Larry Swedroe


In today’s episode, Andrew continues his discussion with Larry Swedroe, head of financial and economic research at Buckingham Wealth Partners. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.

Larry deeply understands the world of academic research and investing, especially risk. Today Andrew and Larry discuss a chapter of Larry’s book Investment Mistakes Even Smart Investors Make and How to Avoid Them. In this sixth episode, they talk about mistake number 9: Do you avoid admitting your investment mistakes? And mistake number 10: Do you pay attention to the experts?

Did you miss out on previous mistakes? Check them out:

Mistake number 9: Do you avoid admitting your investment mistakes?

As human beings, we’re hardwired to avoid admitting mistakes. And, of course, you can’t correct a mistake unless you acknowledge that your behavior was a mistake in the first place. A typical investment mistake most people make is engaging in actively managed funds and stock picking, even though there’s hard evidence that a vast majority of active managers fail persistently to outperform over the long term.

According to Larry, when you’ve made an investment mistake and have a poorly performing asset, the right thing to do is count your losses and substitute the asset with a superior choice. However, many people don’t want to sell because they’ll hurt their ego. Selling means they have to admit that they were wrong in the first place in making that investment.

So for most people, ego and their inability to acknowledge that they’re wrong are the number one reason they’re stuck in bad investments. Most people, when directly confronted, even with proof that they’re wrong, don’t change their point of view. In fact, they tend to defend it more aggressively. They’ll selectively gather evidence or recall information and interpret it biasedly to reinforce their established beliefs.

Mistake number 10: Do you pay attention to the experts?

According to Larry, you shouldn’t listen to experts. But here, he means experts forecasting what the stock market and the economy will do. You should instead listen to experts quoting scientific or empirical evidence in peer-reviewed journals.

When someone’s telling you exactly what’s going to happen, they’re doing it because they’re overconfident. There’s a good chance they don’t know what they’re saying. In Larry’s opinion, only one thing correlates with the ability to make forecasts; fame. The more famous someone is, the worse their predictions are, probably because they’re just overconfident in their skill sets. People fall for such ‘experts’ thinking they know what they’re talking about because they say things with confidence. Larry insists on ignoring such experts. To drive the point home, Larry quotes the authors of Mistakes Were Made (but Not By Me):

“When experts are wrong, the centerpiece of their professional identity is threatened. Therefore, the more self-confident and famous they are, the less likely they’ll admit mistakes. They Just come up with statements to justify the forecast and explain if only this has happened. If only the timing was different, I would have been right. It was some unfortunate event that occurred that wasn’t forecast. So, of course, that’s why you can’t make forecasts. We can’t predict the future with any persistence better than the market does.”

About Larry Swedroe

Larry Swedroe is head of financial and economic research at Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match.

Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has authored or co-authored 18 books.

Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets.

Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect, Advisor Perspectives, and Wealth Management.


Read full transcript

Andrew Stotz 00:00
Hey fellow risk takers this is your worst podcast host Andrew Stotz, from a Stotz Academy and I'm today, I'm continuing my discussions with Larry swedroe, who is head of finance, financial and economic research at Buckingham wealth partners. You can learn more about his story in Episode 645. Larry has a deep understanding of the world of academic research and investing and especially risk. Today we're going to discuss a chapter from or actually two chapters from his book investment mistakes, even smart investors make and how to avoid them. We're going to talk about Mistake number nine. How do you avoid admitting your are sorry? Do you avoid admitting your investment mistakes? Mistake number 10? Do you pay attention to the experts? Larry, take it away?

Larry Swedroe 00:53
Yeah, so it seems that we're really hardwired as human beings to avoid admitting mistakes. And of course, you can't correct a mistake unless you admit that your behavior was a mistake in the first place. And there's a wonderful book, I'd highly recommend to people interested in this subject by Karen Schultz, who wrote a book called being wrong. And she told this story, which I thought was a perfect example of the problem we have of admitting we are wrong. And so I wrote that up in my book. And so to call from it, she's talking about a friend Elizabeth, who got into an argument about whether the constellation Orion was a summer or winter constellation. And she was absolutely convinced that it was a summer constellation, even though it was December and this staring at Orion. She said a friend said I was so damn determined that I figured it was some sort of crazy astronomical phenomenon. My logic was something like, well, everyone knows that every 52 years, Orion appears for 18 straight months, because that's not the way it works. is another one of my favorite examples. It was a teacher. The day after the Challenger, I think it was exploded the US Space Shuttle spaceship, the teacher asked the children to write down what they were doing at that time when it blew up. And then some period of time later, I forgot how many years it was, the teacher looked at each of us and asked the students to write again, what they were doing at the time. And a large percentage of the people got it wrong. And one of the students was so angry, she was arguing with her. That's not what she said. And she even showed her here's your writing, you signed it. And she couldn't admit we have a very hard time admitting we're wrong. And like I said, if you can't admit you're wrong, you can't fix the problem, because you can't admit that you've made a mistake. I think, in terms of how this relates to investing is in are, you know, in at least in the United States, unless you get an MBA in finance, you haven't taken a single course in capital markets theory. So how do you know what the evidence is? yet? So we know the vast majority the evidence says, you know, a huge majority of active managers fail persistently to outperform very, very few succeed over the long term, yet still, close to a majority of individual investors still engage in using actively managed funds and stock picking, you know, on their own. So why is it I get asked the question, Larry, you know, there's all this evidence you've written 19 bucks. Bill Bernstein and John Bogle have written books and many others, showing everyone the evidence. Sadly, the educational system has informed people. Sadly, most people would rather watch some reality TV show and spend a few dollars and a little time to read books like mine, or Bill Bernstein's or John Bogles, and learn. And the third thing is what Carol Schultz wrote about here, they just can't admit they're wrong, even if they know the evidence. They can admit they're wrong. And so that's a problem. And then we get another problem that comes up is because you can't admit you're wrong. If you've made an investment mistake and you have a poorly performing asset, and it's at a loss in a taxable account. You should be hard was thinking that losses and substituting it with now a superior choice. But so many people have a problem if they sell, it's going to hurt their ego because they have to admit that they were wrong in the first place in making that investment. So we see how that can be very costly behavior. The sad part is, most people when directly confronted even with proof that they're wrong, don't change their point of view. In fact, they even tend to defend it more aggressively. All you have to do is watch any politician today. And you'll know that that's true.

Andrew Stotz 05:41
Yeah, and, you know, how do we differentiate for just a second between knowing you're wrong, but refusing to admit it? And the idea of simply having no awareness that you're wrong?

Larry Swedroe 05:55
Well, that's a problem, you have to know the evidence and be presented with it. But let me give you a really good example of this. It's one of my favorite analogies. So I've met with many, you know, pension plans, and family offices, types and endowments, and the process that they have typically gone through, is they either on their own review with the performance of active managers in whatever asset class that they're trying to gain exposure to. And then they choose the managers with the best track records, or they hire a consultant to help them do that. And the evidence shows that people who do that, including the leading pension plans, who hire only the top consultants with great, you know, resumes, right? They're really smart people, they've thought of every question to ask, in their due diligence, they've looked at every metric you could think of, and the evidence shows that if you follow that advice, then the pension plans then ended up with this type of performance. The managers they hired, go on to underperform the very ones they fired. So now you have to ask yourself the question. Einstein said, repeating the same thing and expecting a different outcome is the definition of insanity. Why do you think that since you failed the first time, what are you doing differently? That's going to change the outcome? And I literally have asked that question hundreds of times, and never gotten an answer. And yet they don't. Most people don't change that behavior. I think it has to do simply with the ego and your inability to admit that you're wrong. I mean, clearly, there's evidence there, what you're doing is wrong. So you should change. That's what smart people do. They make mistakes in my book covers 77 mistakes. I know the mistakes I made them, but I learned from them. And I hopefully don't repeat that.

Andrew Stotz 08:13
And so one question then is, if you can't if you can't admit your mistake, can you learn from a mistake that you don't admit?

Larry Swedroe 08:22
No, there's no way to do that. I, I love the quote, There was a British 20th century politician named Lord Molson. He said, I will look in any additional evidence to confirm the opinion I already have come to. That's what people do, they tend to dig in even harder, when you present them with the facts, showing them they're wrong. Now, of course, not everybody does that. But a very significant percentage of the population does it. And that leads to the problem of confirmation bias, we tend to only look at information that confirms our preconceptions or hypotheses, regardless of whether the information is true enough. So we can find 10 academic papers, that should tell you that what you're doing was wrong. Here's the evidence. And you'll listen to CNBC and Jim Cramer, or some other Guru Guru comes on and says something that confirms your opinion. You'll ignore all of the academic evidence in peer reviewed published journals. And you all say, Jim Cramer. He knows what he's doing. And I'll find it doesn't matter. That's, that's the behavior. So we tend to gather evidence or recall information selectively, and, you know, and we interpret it in a biased way. And we end up just reinforcing our established belief.

Andrew Stotz 09:50
Yeah, I was just listening to the audiobook of the Toyota way by Jeffrey liker, and he's describing the, you know, the uniqueness of the way They're managing the company. And one of the principles that he talks about is like management by science, with the idea that you know, that by applying the scientific method you can bring kind of permanent learning into an organization. And then by training and teaching, you can codify that learning, and then move on to the next thing that you got to learn, which is a lot of things to learn.

Larry Swedroe 10:25
It's a really good point, we can apply that, in fact, Andrew Bergen, who was a co author with me on a couple of my books, and I wrote a paper is investing a science. And it's not a hard science, like physics. But we can apply the same scientific methods that you refer to, like, you come up with an hypothesis, you test it, you then do out of sample tests. So if you find a metric predicts returns for over a 20 year period, you then look at periods before and after that, you will look at other countries, you will look at other variations of that metric. So for value, you find price the book works, does price the cash flow work? If it doesn't, maybe your hypothesis was wrong. So using that scientific method can help us come and find what is most likely to be the right answer.

Andrew Stotz 11:23
And one other thing, I was going to tell you kind of a funny story. Maybe it's not that funny. But the reason why I'm such a well balanced guy, Larry is because at the age of before the age of 18, I had been through 2000 hours of therapy. Wow. Which you got to think what the heck, how could you possibly do that? Well, I was in three different rehabs in my high school year. And I mean inpatient rehabs for drug addiction, but one of the things that I recall very well, from those therapy sessions was getting feedback. And so much that the counselors worked on because as a as a drug addict, I was in the throes of kind of selfish, the looking at myself and feeding my desires. And they had to help they wanted to help me to see, you know, my mistakes and what I was saying and all that. And the ability to receive feedback is such an underrated thing. I think it really, this chapter really helps me to remind myself and I think it's good for everybody to just say, you know, it's hard work. And the reason why I mentioned the book, the scientific reference that Jeffrey liker made about Toyota is he said something he says, that stopped me and I had to kind of like rewind and think he said, scientific thinking is not our default. You know, emotional thinking is our default. And that's then brought me back to denial and my the lady who founded the treatment center in Ohio lady named Nikki Babbitt, visionary lady, amazing woman. She always said DDR, denial, delusion and rationalization, like that's what we were fighting against. And I can see that in, you know, what you're saying, last year

Larry Swedroe 13:05
that, go ahead, go ahead. I was just gonna add, there's a wonderful book, I also mentioned, called Mistakes were made, but not by me. Right, it shows. The point is we know people make mistakes, but we can't admit our own.

Andrew Stotz 13:25
So my last thing on this one, before we move to number 10, is the idea that one of the things is if you have mistaken beliefs in your life, that are really wrong, or, you know, are harmful to you, actually, you can exist your whole life, having those beliefs, you know, you build your world around those beliefs, and you build all of that. And some people will come in and challenge it, but you there's ways you can keep them out. But it seems to me like the stock market is that one last place where you can take your beliefs in the stock market, and it will quickly take your money away. And that's why I think that it's like the last place to truly get an honest feedback on your opinion. Now, of course, short term, the stock market may go up until you call him a genius, but that was only that but over a period of time, it seems like the stock market is the last truthful place.

Larry Swedroe 14:22
Let me offer a suggestion for your listeners. If you are ever think you're smarter than the market, I highly recommend that you keep a diary and every time you think something's going to happen, right? Oh my god, this is going to be a debt default and the market will crash. So you I should sell stocks, write it down and then look back and determine how often you were right, that will quickly disabuse you of your ability to forecast markets.

Andrew Stotz 14:57
Great advice. Now this next mistake. My question is, am I supposed to stop listening to you? Mistake number 10? Do you pay attention to the experts in you clearly an expert in the market? So as explained, so great

Larry Swedroe 15:12
question now, because I tell people don't listen to experts. But here I mean experts, who are what I would use the word and I say it facetiously gurus who are forecasting what the stock market and the economy will do, not an expert who was quoting, scientific or empirical evidence in peer reviewed journals. So let me give an example of that. You, you go to a doctor, because you're not feeling well. And that doctor puts you through a battery of tests. And you're, and then sit you down and says, Andrew, you know, here's what we took these tests, here are the results. And then he turns around, and pulls out a copy of the Reader's Digest, and says, based on those results, here's what we should do. To me, that's the equivalent of listening to Jim Kramer, or any of these gurus like John Hussman, or Jeremy Grantham, who are quote, so called experts on that, now you go, so you're being a smart person, you say, hey, you know, I don't trust this advice. This isn't what science says. So you got another doctor, this time, she puts you through a similar battery, a test, and then says to you, based upon your results, and my reading, and she pulls out the New England Journal of Medicine and shows you that here are your symptoms. And based on those symptoms, there's a 70% chance here is your condition. And here's the best treatment for that. But there's also a 30% chance that it's not that, and then we have to do other tests to see what else it could be. And we'll try another treatment. I would hope you would feel a lot better that one case than if you went to a doctor who just automatically said, Andrew, here's your condition. I know this is what it is, this is how we're going to deal with most people would prefer that answer to the one that is uncertain. But it's really giving you the odds of what's happening. The research shows people like certainty. But they the right answer is that when someone's telling you exactly what's going to happen, the they're doing it that because they're overconfident. Yep. And they, and there's a good chance. They don't know what that there's only one thing that correlates with the ability to make forecasts. You know what that is? It's fame. And it's exactly inversely related. The more famous you are, the worse your forecasts tend to be. And it's probably because you're just overconfident of your skill sets.

Andrew Stotz 18:19
It's interesting, because the whole job, what everyone's looking for out of a financial person is to tell me what to do.

Larry Swedroe 18:27
They want that certainty. Yep. So I always tell people, my crystal ball is always cloudy. When I write, which I do a quarterly economic and market forecast, I will always write here are the positive things that are happening in the economy, here are the negatives, here are the risks that might appear that we know are there, then there may be other risks that we don't know about. And you need to make sure your portfolio can address those risks and accept them if they show up. I never tell people the market's going to go up or down 20% I don't think there's anyone who can forecast that fact. I was told when I joined Citicorp long ago. And he said to him, I was we were in the forecasting business. He said, Larry, if you're smart, if you give a forecast don't give both a date and a number one but not both.

Andrew Stotz 19:30
Yeah, as an analyst, and later as a head of research. I remember there was like a point of time that it clicked when a client called me and they asked me why is this you know, a fund manager in Singapore asked me why is this stock going up? And you can't say because there's more buyers and sellers because they're gonna get pissed. That's not

Larry Swedroe 19:49
true. First of all, that's the dumbest thing any because by definition, there has to be for every buyer there is the seller.

Andrew Stotz 19:56
Yeah. So what I really Lies? Is that what he needed? Is he needed a one liner? To tell his boss? Yeah, or to tell his client? And say with

Larry Swedroe 20:09

Andrew Stotz 20:10
Yes. And I realized that the one liner didn't need to be correct. It needed to be done. You know, he needed to have it, it was more important that he had it than it was correct.

Larry Swedroe 20:21
Yep. And that was said with confidence. That's the key is that show saying it with confidence? makes people think, Oh, he knows what they're talking about? Yeah. I'll tell you a great story that will I think your listeners will love. I was a really knowledgeable sports fan growing up, I would study all the baseball cards and could tell you how many triples meant Mickey Mantle hit, you know, every year and all this. But there was one guy who knew way more than me. And somebody would ask him a question like how many errors the dick wrote, make as a shortstop and night. And he would say four. And he just said it with Sir, that he was probably, you know, he had no clue. But he would always say with certainty.

Andrew Stotz 21:09
I think I'm going to use my next presentation. And one thing I want to do now is just kind of look at the flip side. So if we don't listen to experts, you know, one of the things that I really appreciated what I learned from Dr. Deming, in the quality movement was the idea of how do you acquire knowledge? And how do you sustain knowledge in a company. And he talked a lot about making a learning organization. And he talked about what he called the PDSA the plan, do study act cycle, which you could just say is the scientific method, you come up with hypothesis, you're just a guess, you test it in your lab, which is your factory, let's say, and you observe the outcome, and then you make some analysis of it, think about it, and then you either adopt that change, or you adjust it and you go back to that cycle. And let's say you go through that cycle three or four times until you really nailed it that, okay, it seems like this works. And in the physical world, particularly like in a factory, you're dealing with things that are pretty stable, as opposed to the financial world, which is just, it's like a ball of mass constantly being in a past chaos. And it's constantly being influenced by the people that are participating in it. And so it just, it's unpredictable. Whereas in a business and in a factory with repeatable operations, you can apply it. And now then I learned from him. And so he called that education and the acquiring of knowledge, then then there's training, which is how do you now train your staff to maintain what you've learned, and make sure that it doesn't happen again, that you go back to this problem, which then allows you to go to the next level and deal with the next problem, go to the scientific method, and then, and then maintain it through training. And then what I learned from all of that was, if you did that many times through your business in different processes, what you will have done is you will have acquired knowledge that your competitors don't have on that specific area. And that's how you build a competitive advantage. And I really love the learn that but made me think I wrote down while you were talking. Ultimately, what we're trying to do is we're gathering knowledge that builds a framework for investing. And that type of person I want to learn from because like yourself, who is gathering knowledge. But ultimately, we're not saying that we can predict the future or anything like that. So yeah, too long backwards,

Larry Swedroe 23:42
saying the opposite. Right? We can't predict the future. So what we try to do is control the things we can control, can't control what's going to happen in Russia, we can't control inflation, but we can build a portfolio that is resilient to those risks. Right? You could design portfolios that address the risks that are make you the most vulnerable. Now, just for your listeners benefit if they're interested in the subject, about listening to experts, everyone should read Philip Tetlock book expert political judgment, how good is it and how can we know he studied, you know, dozens of professions. And he found that even Professional Forecasters don't make accurate forecasts in any persistent level. Right. And I mentioned the other book, mistakes were made but not by me. The authors wrote when experts are wrong, the centerpiece of their professional identity is threatened. Therefore, the more self confident and famous they are, the less likely they'll be to admit mistakes. They Just come up with statements to justify the forecast and explain if only this has happened. If only the timing was different, I would have been right. It was some unlucky event that occurred that wasn't forecast. So, of course, that's why you can't make forecasts, we can't predict the future with any persistence better than the market does. And that's what's already built into prices.

Andrew Stotz 25:29
And on that note, we're going to have a link, of course to your book. I'll add in the link to expert political judgment. How good is it? And how can we know as well as Mistakes were made, but not by me?

Larry Swedroe 25:44
Yeah, so here's my last bit of advice for your listeners. If you could admit a mistake, when it's the size of an acorn, it's easier to repair than overcomes the size of a tree with deep, wide ranging roots.

Andrew Stotz 25:59
Beautiful, MIT now, well, on that, on that note, Larry, I want to thank you for another great discussion about creating, growing and most importantly, protecting wealth. For listeners out there who want to keep up with all that Larry is doing. You got to find him on Twitter. I am enjoying more and more following what you're putting out and it's at Larry swedroe. And you can find him on Twitter as well. He's on LinkedIn also publishing there. So no excuse ladies and gentlemen, go out and follow Larry because he's got a lot of great stuff to say. This is your worst podcast host Andrew Stotz saying. I'll see you on the upside.


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About the show & host, Andrew Stotz

Welcome to My Worst Investment Ever podcast hosted by Your Worst Podcast Host, Andrew Stotz, where you will hear stories of loss to keep you winning. In our community, we know that to win in investing you must take the risk, but to win big, you’ve got to reduce it.

Your Worst Podcast Host, Andrew Stotz, Ph.D., CFA, is also the CEO of A. Stotz Investment Research and A. Stotz Academy, which helps people create, grow, measure, and protect their wealth.

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