Rely On Science, Not Opinion
The original Hippocratic oath also required the doctor to use appropriate means of care, most often the established and accepted medical practice.
Consider the following situation. You aren’t feeling well. You make an appointment to visit a doctor your friend has recommended. After a thorough exam, he turns around to his bookshelf and reaches for the latest copy of Prevention magazine. Even before hearing his advice, you’re already thinking it’s time to get a second opinion. So, you make an appointment with another doctor.
After her examination, she reaches for a copy of The New England Journal of Medicine. At this point, you are feeling much better about the advice you’re about to receive. The financial equivalent of The New England Journal of Medicine is a publication such as The Journal of Finance.
Advisors should be able to cite evidence from peer-reviewed journals supporting their recommendations. Just as you should prefer a doctor whose care is evidence-based, not intuition-based, you should prefer a financial advisor who provides evidence-based advice.
In both cases, the advice should be easily understandable and transparent. One of the things I’m most proud of is that so many readers of my books have told me about what might be called their “aha!” moment. That’s the moment they finally understood how markets work, how prices are set and what the winning strategy is.
Tell You When The Evidence Isn’t Always Available
While the ability to provide evidenced-based advice is always preferable, it’s important to understand that, in medicine, there are times when the science just isn’t there—for example, studies regarding the specific problem have either not yet been done or are not of good quality.
In those instances, an ethical physician is obliged to inform the patient that her recommendation is based on prior experience. Otherwise, the whole relationship is undermined. Patients should not assume that physicians have all the answers simply by virtue of their position, because that’s certainly not the case. Decisions can’t always be as data-driven as we would like, especially when dealing with unusual diseases.
The same thing is true with investing.
It’s especially true when it comes to events often referred to as “black swans.” Those are market occurrences that come as a surprise, have a major effect and are often inappropriately rationalized after the fact with the benefit of hindsight. There will be times when financial advisors won’t have all the answers, and they shouldn’t pretend that they do. So what should the financial advisor, or doctor, do in such a situation?