Steering Clients Away From Market Noise

Chuck Etzweiler is the senior vice president of research at Nepsis, a financial advisor and investment-management firm. With more than three decades of investment industry experience, Etzweiler directs the firm’s research, helping both advisors and clients understand the philosophy and strategy of Nepsis more deeply. 

Jeff Benjamin: What is this thing you call “Addiction to Prediction” and why is it important to financial planning? 

Chuck Etzweiler: Investors, like all people, are drawn to predictions; especially those that play to our natural fears of the unknown. Many of these portents and projections are intentionally constructed in a storytelling format designed to alleviate our anxiety over uncertainty. 

One of people’s greatest fears is losing money, so it would only be logical that with the near-term uncertainty that encompasses investing, predictions would be used to soothe this anxiety. 

JB: Where did the idea come from?  

CE: With the staggering evidence supporting humans’ inability to predict the future, we sought to answer the question, 'Why do investors rely so heavily on using forecasts to make investment decisions?' 

Many investors keep predictions of market events at the center of their investment process. In our industry, how many times have we been subjected to the age-old question, ‘What do you think the market is going to do?' 

Even though we do not know what will happen, we feel compelled to answer. It may be best for us to take the advice of a famous Chinese proverb, ‘Those who have knowledge don’t predict, and those who predict don’t have knowledge.’ 

JB: Why does it work? 

CE: We propose the main reason is a result of investor ignorance. We say this because most investors do not have a clear understanding of what they own and why they own it. Thus, they harbor under the veil of uncertainty. 

To soothe this fear of uncertainty, they anchor their hopes or latch onto any data points, regardless of how irrelevant they may be, to substantiate their portfolio decisions. The behavioral bias of anchoring permits people to continuously subject themselves to meaningless predictions despite their ineffectiveness.  

JB: How does it work from a behavioral finance perspective?  

CE: Based on the long-term statistics of stock returns, the likelihood of generating wealth from owning companies is undeniable, especially those that are value-oriented and issue dividends. 

We readily admit that we do not know what the fluctuations in equity prices will be on a day-to-day, month-to-month or year-to-year basis. This is something that nobody has access to, something many are unwilling to admit, fooling themselves and investors. 

By focusing on the probabilities of outcomes and the likelihood of an event, we can have a greater sense of honesty in our philosophy and provide investors with the clarity they deserve. 

JB: How could other advisors employ this same or a similar strategy?  

CE: Stop pinning hopes on market calls, short-term tactical shifts and algorithmic machinations in generating market returns. Instead, rely on the long-term historical precedence stipulated by facts and supported by wealth generation created by owning solid businesses over the long haul. 

Several strategies don’t need forecasts as inputs, such as intrinsic value and dividend capturing. We call this clarity of philosophy and strategy. 

Do not believe everything you read. Hyperbole is rampant in today’s environment on both the ultra-bearish and bullish sides. Detach the ripcord to spurious anchors that soothe our fears of uncertainty. 

Embrace the uncertainty which the investment world calls volatility and make it your ally. An honest assessment of differentiating between what we know and don’t know is emotionally healthy. 

Contact Jeff Benjamin at [email protected] and find him on X at @BenJiWriter